Some of the greatest fluctuations since the COVID-19 pandemic really grew fangs and bit the Australian economy hard has been in the normally staid area of home loans.
If you had said a year ago that one in every fourteen home loans would have deferred their repayments for six months with permission from their bank, people would have laughed.
But that has happened very quickly with the Australian Bankers Association saying that those 429,000 deferred mortgages represent a staggering $153.5 billion.
It has also been a very active time for refinancing with Finder numbers showing March was a very strong month with more than 26,000 loans valued around $11.5 billion refinanced.
That is up 8% on February and it would not be a surprise to find that the refinancing flurry gathers pace, particularly as rate variability within the home loan segment becomes quite extreme and households try to reduce their outgoings wherever they can.
Fixed mortgages much cheaper than variable
One of the forces driving this home loan activity is the Reserve Bank, which is pushing hard to dramatically reduce banks short term funding costs by effectively offering banks short term loans at just 0.25%.
That has pushed fixed housing loans down close to 2% – opening up a wide gap with more traditional variable loans that are still averaging about 3.5%.
Of course, fixed rate housing loans which usually run for around three years do not suit everybody because they lock you in if rates were to fall further and they don’t have a range of facilities such as offset and redraw, have high break costs and usually won’t allow extra repayments.
Fixed loans also don’t reduce the principal amount during the term of the loan, which again makes them cheaper in a repayment sense but less suitable in the longer term in which a principal and interest loan allows for the loan to be paid off over time.
However, at a time when every dollar counts and official interest rates seem to have hit the lowest level they can realistically fall, the wide gap between fixed rates and variable is encouraging a lot of activity, overcoming the disadvantage of having to renegotiate another mortgage when the fixed term expires.
The difference is obviously substantial with the biggest fixed/variable gap of 0.84% worth about $3360 a year or $280 a month on a $400,000 loan, although the actual gap is likely to be a little lower than that.
Reserve Bank is the reason behind low fixed home loans
The reason for the cheaper fixed rates was spelled out by the Reserve Bank which in March announced that it was supplying cheap credit to banks through its Term Funding Facility.
That stimulus measure is worth $90 billion and provides a three-year funding facility to the banks at a fixed rate of just 0.25% – so the banks will still be making good money on those fixed loans.
Reserve Bank minutes said this funding was “substantially below lenders’ current funding costs”, which is one of the main reasons such a big gap has opened up between fixed housing loans and variable.
Fixed loans may go up again after September
There are limitations on the RBA’s cheap loans – banks are restricted to funding up to 3% of their outstanding credit and the loans are only available until the end of September unless the scheme is extended.
Often home buyers who take out fixed loans are dismayed when general interest rates move lower while their rate remains fixed and they are paying a rate which was good at the time they took out the loan but is no longer competitive.
That may not be as much of an issue at the moment with the RBA indicating that it has paused official rates and is reluctant to go negative, which any meaningful move below the current 0.25% official rate would probably entail.
So, there is a window of opportunity between now and September to get a cheaper than usual three-year fixed home loan that will probably not leave borrowers unhappy because they failed to pick the bottom of the rates curve.
It seems a lot of cash strapped Australian are jumping on that opportunity.