Are We at the Bottom of the Home Loan Rate Cutting Cycle?

Home loan rates are lower than they have ever been, so are we at the bottom of the home loan rate cutting cycle – or will rates fall even further?

I remember not long ago, home loan rates were sitting around 5% and I was having the exact same conversation with clients that I am having right now. Rates are low, they have never been this low, and at some stage rates will likely need to go up again – but even that is not a guarantee until it happens.

Just because mortgage rates are historically low, this does not mean they cannot go down further, but there would likely need to be some type of major event in the economy. The current pricing policy appears to be adequate, the economy is moving along and property is still going through its various cycles in different states.

At its November Board meeting, the Reserve Bank of Australia strongly suggested that the time for easing monetary policy has now passed, which could signal rate increases in the future. In addition, some lenders have recently increased their fixed rates, which could be an indication of things to come – or simply a one-off increase.

The problem with timing the bottom – whether it be the bottom of the property market or the bottom of the mortgage rate cutting cycle – is that you do not usually know you have hit the bottom until you have missed it and rates are going up again.

If you are considering fixing your mortgage due to low fixed home loan rates, there are a few things to consider.

First, banks and lenders generally have a panel of experts and researchers that help determine where to set their fixed rates – so the chances are they will have far more insight and information into where rates could be going. If you are fixing, you are betting against the bank.

Secondly, affordability – can you afford for rates to go up? If not, you may want to consider whether fixing is going to help alleviate that risk, which could be a viable solution.

Third, your loan-to-value ratio (LVR) – some banks will have a different variable rate for home loans with a different level of deposit, whereas the same lender may have no such limitations in place for their fixed rates. One example is a lender that offers over 4.3% for variable rate loans over 90% LVR and yet offers below 3.7% for some of their fixed rate products, so there could be a substantial difference in repayments.

Last of all, rates are low – if you fix at 4% and rates drop to 3.75% tomorrow, you may lose out on a small amount of savings, but you are still far below historical averages and on a low rate. You may not find that a big concern, especially if rates go up again in a year.

If any one person knew where rates were going, they would likely keep it a well-guarded secret under lock and key. The truth is that no one really knows for sure. There are many experts who can make a highly educated estimate – but at the end of the day, you have to be comfortable with whatever decision you make. Try not to get too caught up in the rate game and make the decision that protects your financial security, even if that means missing out on catching the bottom of the cycle.