Non-banks tended to have lower home loan borrowing rates than the big banks. Image: Canva.
  • Hindsight is 20/20 as 53% wished they had fixed low rates in for longer
  • Following the cash rate easing, five year fixed rate loans dropped an average 0.76 percentage points
  • Non-bank rates were, on average, half a percentage point lower than the big banks

The combined impact of interest rate rises, inflation, and the higher cost of living is leaving many Australians pining for the low interest rates of yesteryear.

After holding steady at 0.1%, the official cash rate has gone through twelve rises since May 2022. April came as a relief to many, as the RBA put rates on hold, however, the cash rate continued to move up in May, and now June.

As Australian borrowers scramble for certainty, fixed home loan interest rates are becoming more popular. While sweeteners like cashback deals are being quickly withdrawn, one reality is adding to the fixed rate appeal: rate cuts.

To fix or not to fix?

The current cash rate is sitting at 4.10%, a stark difference to the Covid low cash rate of 0.1%. In simple terms, that is a four percentage point rise, but that does not compare to the true magnitude of the change: the latest interest rate is 41 times higher now than during Covid.

It is unsurprising many wished they had locked in lower rates for longer. Mozo‘s January consumer survey revealed more than one in two (53%) Australians said they wished their mortgages had been fixed for five years.

For those who did lock in rates, many will soon see the impact of the rate rises as they come off those historically low home loan rates.

Often referred to as the ‘fixed rate cliff‘, The Property Tribune asked Mozo’s banking and interest rates expert Peter Marshall whether it would put borrowers off fixing rates.

“Very few people have been fixing over the last year or so as those rates went up sharply,” said Marshall.

“However, that is starting to change as fixed rates are being cut again.”

Peter Marshall, Mozo

“As long as people know what happens at the end of their fixed period and they plan for that, there’s no reason to not consider a fixed rate period. Those that might be struggling to adjust to higher rates now after several years of an amazingly low fixed rate have saved a lot in interest while that rate was available to them.”

How has Covid affected 5 year home loans?

As the RBA cut rates, home loans likewise tumbled. Data from Canstar shows that prior to the cash rate easing (the cutting of rates), a five year fixed rate loan would have sat around 3.41%, thereafter moving to 2.65%.

Covid’s effect on home loan interest rates

Before COVID-19 Cash Rate Easing (Feb-20) End of COVID-19 Cash Rate Easing (Nov-20) Difference
Cash Rate 0.75% 0.10% -0.65%
Variable Rate 3.69% 3.31% -0.38%
5 Year Fixed Rate 3.41% 2.65% -0.76%
Source: Canstar 24/05/2023. Interest rate based on the average owner-occupier loan on Canstar’s database, available for a $500k, principal & interest, 80% LVR loan, excluding introductory and other special condition loans. Monthly repayments assume a loan term of 30 years.

Banks versus non-bank lenders

Home Loan Experts’ Otto Dargan explained that during periods of economic uncertainty, people tend to choose brands that appear secure to them.

“This isn’t necessarily a good move, as most lenders in Australia are very safe,” said Dargan.

“A good mortgage broker will know which lenders are strong, and which have cheap funding at different times in the economic cycle.

“Australian banks in general are required to meet many strict regulations that are not required of foreign banks. It’s why we’ve had so few bank collapses compared to other countries.”

Otto Dargan, Home Loan Experts

Canstar said that non-bank lenders tend to offer lower rates than banks, however as the rates rise continues the cost of funding for non-bank lenders climbs higher than it will for banks. One driver was that “non-banks don’t have access to cheap deposits they can call on for funds, while banks that offer savings accounts do.”

Rate comparisons between banks, non-banks, and major banks

Average Rates/ Repayments Bank (Majors excl.) Non-Bank Major Bank
($500k, 80%LVR, P&I, 30 years) Avg. Interest Rate Monthly Repayments Avg. Interest Rate Monthly Repayments Avg. Interest Rate Monthly Repayments
Variable 5.71% $2,906 5.67% $2,892 5.99% $2,995
5 Year Fixed 6.24% $3,076 6.03% $3,006 6.53% $3,169
Source: Canstar – 25/05/2023. Based on the average owner-occupier rate on Canstar’s database, available for a $500k, 80% LVR, principal & interest loan; excluding introductory and special condition loans. Average calculated from the lowest rate available from each provider. Monthly repayments assume a loan term of 30 Years.

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