Last year was, shall we say, an unprecedented year, particularly for finance and particularly for home loans.

Commonwealth Bank's half-year results revealed its fixed loan book grew 38% compared to the first half of 2020.

As Australia's largest home lender, Commbank's results tend to be a good indication of the rest of the market, and fixed rate home loans in particular have been slashed by massive amounts in recent months. 

Just this morning, ME Bank reduced its 'Member Package' loan for owner occupiers with an 80% LVR by 20 basis points to 1.99% p.a. (3.33% p.a. comparison rate*).

This is the bank's first foray into the sub-2% home loan market, and yes, this home loan is fixed for two years.

Back in November, NAB chief Ross McEwan said the growing popularity of fixed lending was because borrowers want loan certainty in times of uncertainty.

While this is a factor, another big factor is lenders with a banking licence have access to the Reserve Bank's 'Term Funding Facility' (TFF), a pool of around $200 billion for lenders to use at an interest rate of either 0.10% or 0.25% over three years. 

"There has been a huge demand for fixed rate loans because of the highly competitive pricing – we’re seeing record low fixed rates," Tic:Toc's head of marketing Laura Osti told Savings.com.au.

"To stimulate the economy, the Reserve Bank of Australia has been making it cheaper for banks to borrow over a longer time period - which means very low fixed rates." 

The big four banks in particular have access to tens of billions in the TFF, while non-bank lenders miss out on the funding as they do not have a banking licence.

However, Westpac's chief economist Bill Evans said the "prospects for continuing the Term Funding Facility are low" after the Reserve Bank Minutes from its meeting earlier in February pointed to its reshaping in June 2021.

"[The] RBA will reshape the Term Funding Facility when the current scheme expires [at the end of] June to narrow the focus on specifically boosting business lending," Mr Evans said.

An extension would only happen if "there was a marked deterioration in funding and credit conditions”, according to the Reserve Bank governor Dr Philip Lowe, which Mr Evans said was "extremely unlikely".

"In that regard the Minutes noted that the national house price index had returned to highs of four years earlier; there were few signs of a deterioration in lending standards; and new loan commitments for owner occupiers were above the previous high of 2017; although investor loan commitments remained 'well below earlier peaks'," Mr Evans said.

To fix or not to fix?

Tic:Toc's Ms Osti pointed out some of the pitfalls of fixed home loans.

"There is less flexibility with a fixed rate home loan, so if your position changes and you want to change your loan during the fixed term, you could be stuck with large break costs which will probably outweigh the saving you’ve made from the rate," she said.

One mortgage broker who spoke to Savings.com.au back in July said one borrower was hit with a $35,000 break fee for exiting a five-year fixed loan early.

Many fixed loans also do not allow the borrower to make extra repayments.

However, Ms Osti also pointed to the benefits of fixed lending.

"If you want certainty of repayments and are in a position to take a longer term view, it is definitely a good time to do your research and find a competitive fixed rate with the features you want," she said. 

"Look out for the roll-to rate, which points out what variable rate you’ll be rolling to after your fixed term."

Photo by Lochlainn Riordan on Unsplash



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