How to take advantage of lower interest rates to protect yourself in uncertain times

On March 19 the Reserve Bank of Australia announced an emergency interest rate cut that reduced the cash rate to an unprecedented 0.25 per cent.

Not all banks have as yet responded to the change, but initial announcements from a few have set the scene for a new environment of record low fixed interest rate loans for residential borrowers.

Commonwealth Bank was the first to announce a one to three-year fixed rate loan at 2.29 per cent, ANZ followed with a two-year fixed offering at 2.19 per cent and ING has announced a two-year fixed loan at 2.09 per cent.

Is now the time to refinance?

The current batch of fixed interest rate loans on offered are “staggeringly cheap,” according to Domain Home Loans executive director and Lendi managing director David Hyman.

“Only a couple of months ago the cheapest headline rate started with a three,” he said. “If you look back to this time last year rates were in the high threes.

“For someone with a half a million dollar mortgage, that is well in excess of $10,000 a year in savings. It’s never been a better time to refinance quite frankly.”

Some borrowers may be wondering whether there is a possibility of mortgage rates dropping even further.

There is still a lot of room for competition between fixed and variable rates among the banks, according to Foster Ramsay Finance principal finance broker Chris Foster-Ramsay.

“You’ve got to remember that the variable rates haven’t dropped a second time, they’ve only dropped once, and banks that have dropped them have only dropped 15 out of 25 basis points,” he said. “[The banks] have to keep a little bit of their powder dry to be able to offer those kind of incentives down the track if need be.”

But for those looking to take action now, Hyman said mortgages have never been cheaper.

“These are the lowest consumer mortgage rates we have seen in history and with the cash rate being at 0.25 per cent, there’s not much further for it to go,” he said.

“Though we certainly don’t have a crystal ball, we’d suggest to everyone that it is not going to get much cheaper.”

Exercising caution 

Foster-Ramsay warns that while it is good time to be approaching your bank or your broker to look at options, borrowers should be careful to weigh up all the pros and cons presented to them, as some fixed loans come with limited features.

“You’ve got to be careful when you fix a rate that you’ve got it structured the right way, because they can be problematic in the terms they present to the client,” he said, adding that additional repayments might be capped or redraw facilities may be unavailable.

“If consumers want to go down that track the best way to do it is part-fixed, part-variable,” her said.

Foster-Ramsay says his clients in this position generally split their loans, keeping 30 to 40 per cent variable, while fixing the remaining 60 to 70 per cent for no more than three years.

Considering rates have dropped so much over the past 12 months, some borrowers may find themselves looking to break a previously fixed loan in order to refinance.

“Where people have fixed in rates of 3 per cent or 4 per cent, it is exceptionally expensive to break those,” Foster-Ramsay said. “You need to be able to have a clear benefit to refix or refinance and refix at a different institution in the current rates that are on offer at the moment.”

Mortgage stress

Refinancing to lower rates may give some borrowers relief in these uncertain times, but there are further steps that can be taken if livelihoods have been lost or put on hold due to coronavirus-related restrictions.

Banks are currently assessing customers on a case-by-case basis if they have been affected.

“APRA has basically come out and said these are unprecedented times, and as such banks need to adjust their policies in order to support their customers,” Hyman said. “It is different from bank to bank, but most of them are doing payment holidays, whereby you put your loan on pause for three months, or six months and they can reassess in three months.” 

In most cases, deferring repayments will mean the interest is capitalised. This means interest will continue to accrue, and will be added to the home loan balance, and will mean you’ll likely pay more interest overall in the long term. Banks will either extend the total loan term by the length of time repayments were deferred, or slightly increase future repayments to account for the repayment holiday.

Customers may be able ask their lender to convert a loan to interest-only payments for a period of time.

Refinancing and social distancing

Given the current situation and restrictions around human contact, online broking has really come into its own, Hyman said.

“I think it is important for people to realise that even though we have these social distancing measures, you don’t have to put this on pause. There has never been a better time to refinance and doing it online makes more sense than ever.”