When the RBA brought the cash rate down to 0.1% in November last year, the big four responded by dropping interest rates on their fixed rate loans while leaving their variable rates untouched. Now, the majors are offering interest rates well below 2% on four-year fixed rate home loans, while offering sizeable cashbacks on refinances. This has given them a competitive edge – something that the non-majors are responding to, said Top 100 broker Rajan Khatak. MPA spoke with the managing director of Your Finance Adviser about whether this trend will continue and why the question of fixing is more than just a matter of timing.
Fixed rates are down
With the current cash rate likely to stay put at 0.1% for the next few years, banks are feeling comfortable enough to offer low fixed rates to their home loan customers, said Khatak. This is something the non-majors have also started to do, but the big four have gone one step further and introduced cashback offers to really stand out.
Read more: Does more cashback mean more clawback?
“Except for a few non-majors, cashbacks are not there, and generally four-year fixed rates are slightly higher compared to the majors,” he said.
By offering low fixed rates and attractive cashbacks, the big four have implemented a clever strategy to gain more customers and keep them locked in for the next four years, thus growing their books and retaining new customers at the same time, he added.
Competition is rife
While a few non-majors are offering cashbacks as well as low fixed rates, others could soon follow suit in a bid to compete with the big four, he said. But, while this could create an environment of even more competition among the banks, the question of whether to fix now or wait for a better deal is secondary to a range of other considerations.
Read more: Is now the right time to fix interest rates?
“It’s very important for a broker to understand a client’s situation and then advise them accordingly,” Khatak said. “There are a number of things you need to consider. You need to ask the customer about their short-term plans over the next 2-3 years and what they are planning to do in the long term? Are they going to sell their house, upgrade or are they planning to retire?”
If a customer is likely to make any such transitions over the next few years, they could be much worse off by fixing – in fact, the break fees they may have to pay could exceed the savings they would get if they fixed to a lower rate.
In addition to this, Khatak said savings capacity was another major consideration, particularly if the client’s money was being held in an offset facility. Those who are able to save quite a lot in their offset facility may not benefit from fixing their loan in the way that lower income earners could.
In any case, the borrowers are the winners in this competitive low-rate environment, said Khatak. For those paying 7% interest on their home loan 10 years ago, the ability to fix interest at sub-2% is a very attractive proposition indeed, as is the potential to have the best of both worlds via a split-rate loan.