Will low fixed rates push borrowers back to the big four?

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on November 10, 2020
Will low fixed rates push borrowers back to the big four?

Photo by James Pond on Unsplash

In today's record low interest environment, fixed rates are all the rage, so will they surpass variable rates in popularity among borrowers?

In the wake of the Reserve Bank's (RBA) latest cash rate cut, only ten lenders have passed on the cut to variable rates at the time of writing. 

Instead, the majority of lenders have made cuts to their fixed-rate products, with many now offering sub 2% loans. 

Buying a home or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for owner occupiers.

Lender

Variable
More details
  • Min 30% deposit
  • No monthly or ongoing fees, add 0.10% for offset
  • Unlimited redraws

Variable Home Loan (LVR < 70%)

  • Min 30% deposit
  • No monthly or ongoing fees, add 0.10% for offset
  • Unlimited redraws
Variable
More details
REFINANCE ONLY
  • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
REFINANCE ONLY

Variable Rate Home Loan – Refinance Only

  • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
Variable
More details
AN EASY DIGITAL APPLICATION
  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
AN EASY DIGITAL APPLICATION

Neat Variable Home Loan (Principal and Interest) (LVR < 60%)

  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
Variable
More details
NO ONGOING FEES
  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
NO ONGOING FEES

Yard PAYG Home Loan (Principal and Interest) LVR ≤ 80%

  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of August 10, 2022. View disclaimer.

This includes the big four, who are all offering a fixed rate below 2%, except ANZ, with NAB's four-year fixed rate the lowest at 1.98% p.a (*comparison rate 3.69% p.a). 

Variable rates have long hogged the spotlight in Australia, bucking the international trend of fixing, but with variable rates seemingly as low as they could go, it may be time for fixed loans to shine. 

NAB chief executive Ross McEwan told banking analysts last week that fixed rates could increase their market share by more than 20%. 

“It could be more than 30% (across the banking sector) … but I wouldn’t fear that,” he said.

“The reality is that this market is moving more toward fixed rates for certainty, it was about 10% of the (NAB) book, I think you’ll see it quite quickly getting to 30% … we are seeing that in the (new mortgage) flows.”

Mortgage Choice CEO Susan Mitchell said more and more borrowers were opting to fix their mortgage in recent months. 

"Mortgage Choice home loan approval data shows that the trend towards fixed rates remains strong, with 32% of borrowers choosing to lock in part or all of their rate in October," Ms Mitchell said. 

But Property Investment Professionals of Australia (PIPA) Chair Peter Koulizos said he was doubtful fixed rates would exceed the popularity of variable rates. 

"I think they'll become more popular than they are now, but I don't think we'll have more people on fixed rates than variable," Mr Koulizos told Savings.com.au.

"Generally Australians, unlike other people around the world, go for variable rates rather than fixed rates." 

The vast majority of the US and UK mortgage market is fixed, with lenders in America offering 30-year fixed home loans. 

Dr Jamie Alcock, associate professor at the University of Sydney, told Savings.com.au the move to fixed rates was coming from lenders, rather than consumers. 

"Shifting consumers to a fixed rate gives the banks more surety over their future cash flows," Dr Alcock said.

"If rates aren’t going up anytime soon then the balance sheet issue is less of a problem.

"Both of these are likely to be attractive to banking shareholders in the near future, especially given the drop in bank dividends recently announced." 

Will borrowers flock back to the big four? 

AFG brokers reported the major lenders had a home loan market share of 58.9% in Q1 2021, down from 66.8% as refinancers flocked to non-majors. 

But with so many lenders offering fixed rates similar to or below 2.00% p.a, will borrowers return to the safety and well-known embrace of the big four? 

"I think that would certainly increase their market share, but again, it will only be for people looking for four-year fixed rates," Mr Koulizos said. 

"And who knows, tomorrow or next week, there could be a big marketing campaign from the non-bank lenders to offer cheap variable rates; the landscape is ever-changing."

PRD Real Estate chief economist Dr Diaswati Mardiasmo said whether borrowers return to the big four would essentially come down to which lenders will grant them a loan. 

"The big four banks have proven that they can match other lenders and are extremely competitive now, which does make them attractive," Dr Diaswati told Savings.com.au.

"That said the big four does have a reputation of more stringent lending criteria, and one of the reasons people go to other smaller lenders is due to this.

"Therefore it can be quite personal, and it just depends on who will provide you with a loan." 

Is it a good time to fix? 

Dr Alcock said despite the sub 2% fixed rates on offer, it was hard to definitively say whether it was the right time to fix. 

"Well nobody can be sure but the RBA has indicated that rates will stay low for an extended period of time and they have recently commenced a quantitative easing program, which they may extend," he said. 

"This may well push commercial rates down further, especially for the longer-term loans." 

Mr Koulizos urged caution to borrowers who thought rates were the lowest they could go. 

"People need to be aware just because something is really cheap today doesn't mean that there won't be some other really cheap products in the near future.

"With banks relaxing their lending restrictions in March, I think we'll see some even bigger and better incentives for consumers." 

For first-home buyers, Dr Diaswati said the current fixed rates were a great way to enter the market.

"None of us truly know when COVID-19 will be eradicated or when the economy is in full recovery as per prior to COVID, so some stability to your mortgage payments give you a sense of confidence as you can then plan all of your other household budget items/expenses for a longer period of time." 




Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

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Alex joined Savings.com.au as a finance journalist in 2019. He enjoys covering in-depth economical releases and breaking down how they might affect the everyday punter. He is passionate about providing Australians with the information and tools needed to make them financially stable for their futures.

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