Interest rate issue exposed as banks jump the gun on cuts: 'You'll never beat the bank'

Last week, yet another bank announced they were slashing their fixed rate loan by 0.6 per cent. I’m not sure exactly how many banks have drastically cut rates in the last couple of months – I stopped counting at 12 – but it’s safe to say it’s definitely a trend.

Why are banks doing this?

Well, it’s not out of the kindness of their heart. It’s because they know the cash rate (and therefore, your variable rate home loan) is on the way down. Inflation has cooled and we’re now at risk of recession, so that RBA has to take the pressure off our budgets and keep the economy flowing by loosening our purse strings.

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So, banks want to lock in your business NOW with a discounted fixed rate.

If they can sign you up for three years at 5.69 per cent, that means you’re not going to be shopping around and comparing rates over the next year or two when the cash rate falls.

Should I fix my interest rate?

If you have a home loan, it means you have a choice to make. Banks are slashing fixed rates by up to 0.9 per cent – almost a full per cent. That’s a really tempting prospect for someone whose mortgage has shot up by $1,000 a month or more.

So how do you figure out if fixing your rate is the right decision for you?

First, it would help if you know exactly what is going to happen with the RBA.

Obviously, no one knows this with any certainty. But we give it a really good crack with the Finder RBA Cash Rate Survey™, where 42 experts and economists gave their two cents on where cash rates are heading.

This month, surprise, surprise – they all (literally 100 per cent) agreed that the RBA would keep rates exactly as they are. They say the chances of any rate cuts are pretty slim right now because inflation is still too high, and the job market is strong, with unemployment staying low.

Here’s what the experts think will happen:

• Only 15 per cent think we’ll see a rate cut in 2024, which is actually down from 26 per cent last month.

• That said, the Fed in the United States cut rates by 0.50 per cent this month – some think we might follow suit and cut in November.

• Most experts (68 per cent) are betting on a cut in the first three months of 2025.

• The market is pricing in four rate cuts over the next 12 months.

While it’s impossible to plot out what will happen month by month, we know that the expectation is that by September 2025, the cash rate will drop 1 per cent, from 4.35 per cent to 3.35 per cent. In theory, your home loan variable rate should drop by the same amount.

I know so many people are agonising about what to do, and while this is general advice only, it might help you figure out what matters most as you make a decision.

How can I work out if a fixed rate is best for me?

1. Look at your rate today. It’s likely to be somewhere between 6 per cent and 7 per cent, obviously, the lower the better. (Tip – if you haven’t asked your bank for a rate review this year, give them a call. It takes 15 minutes and you could get an instant discount).

2. Consider your repayment. Can you afford it? Is it putting pressure on your finances right now to the point that you’re stressed and you’re not sure how you’re going to pay your bills? Or are you managing okay?

3. Check fixed rates on offer. Right now, discounted fixed rates are in the range of 5.5 per cent to 5.7 per cent for a lock-in period of 1 to 3 years. Use a mortgage calculator to work out how much less would you pay if you fixed your rate?
   
   For instance: Bendigo Bank currently charges 6.49 per cent ​​for a variable principal and interest loan. In early September, they cut their 2-year fixed rate to 5.54 per cent.
   
   Based on an average home loan size of around $600,000, the monthly payment is $3,789.
   
   Locking in a fixed rate at 5.54 per cent drops this to $3,422 – a saving of $367 per month.

4. Now, the really big decision. You want to make a decision based on this data, not emotion. The question to ask yourself is: would the immediate savings of moving to a fixed rate solve problems for you? Would a monthly saving take a lot of pressure off? Or do you want to just stop thinking about your mortgage and fixing it would give you a bit of peace of mind?!
   
   Also important to consider: would these immediate savings outweigh the frustration you’d feel if rates dropped further than 1 per cent? What if they fell by 2 per cent? There’s no telling what rates will do or how far they will fall, so if you’re okay to go with the variable rate flow, you might end up paying less overall.

I have experienced both sides of this situation and I can attest: it can be an emotional rollercoaster.

I fixed my rates many moons ago at 7 per cent for 2 years, only for them to fall to 4.5 per cent not long afterwards. Devastation central.

I fixed at 3.99 per cent for 2 years just before Covid – and I paid almost $10,000 to break that loan when rates fell to 2.99 per cent, because I had a hunch they’d fall even further.

Though it was painful, I’m glad I followed that instinct, because I saved about triple that amount over the next 2 years when the cash rate dropped to 0.1%.

I also fixed at 1.9 per cent in December 2021, so I’ve benefited from very low rates over the last couple of years.

The bottom line? You’ll never “beat the bank”, so don’t try to. Focus on your situation. What makes most sense for you, and your budget, and your financial situation? Let that be your north star, and cut out all the interest rate noise once and for all.

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