As financial markets get ever more gloomy in their outlook for the economy, it is leading to lower borrowing costs for home loan customers who are prepared to lock in an interest rate.

Fixed-rate home loans – which reflect the market’s expectations about official rates set by the Reserve Bank – have slid significantly in the past six months.

Lenders – including AMP, Aussie Home Loans, Westpac and Citi – have cut some of their fixed-rate loans in the early part of 2019, with most of the reductions targeted at owner-occupier customers.

It’s a trend that probably has further to run, as banks try to entice cautious customers to wade into a falling property market.

Why the change? Markets have placed growing bets that the RBA will cut official interest rates from their record low of 1.5 per cent some time this year.

Figures from Mozo, a comparison website, show the most cuts have been made in two and three-year fixed loans, but there have also been significant cuts in longer terms of four and five years.

There have been 45 cuts in two-year fixed rate loans in the past six months, with an average decrease (among those cut) of 0.16 percentage points. There have also been 42 cuts in three-year loans – the most popular term – with an average fall of 0.14 percentage points.

The sharpest deals, which tend to be from smaller lenders, allow customers to lock in a two-year loan at 3.58 per cent, or a three-year loan at 3.69 per cent, Mozo says.

At first glance, those rates look cheap. They are lower than what most banks offer in their variable rate loans.

However, fixing an interest rate is a bit of a gamble.

Just months before the global financial crisis struck in 2008, the proportion of people fixing reached a peak of more than 25 per cent.

Within months, many of those borrowers were caught out after the Reserve Bank started slashing variable rates in response to the global financial disaster.

Right now, market pricing implies the cash rate will be 1.25 per cent by August and 1 per cent by April next year.

Peter Marshall, from Mozo, says there is a risk of “buyer’s remorse” if, as some believe, the central bank does cut rates.

“The banks will be looking to lock people in at these rates before the RBA cuts,” Marshall says.

He says a two-year rate of 3.58 per cent might look “great” today, but it’s much less certain it will be as good a deal in six or nine months time.

However, for borrowers who want the extra certainty of knowing their repayments, fixing some portion of their loan could make sense as a way of hedging your bets.

SMH / March 20, 2019

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