Fixed mortgage rates falling but jury is still out on variable rate mortgage moves

Battered borrowers watching fixed interest rates fall may still have to wait a few more months for variable home loan relief. Here’s why

Home loan interest rates have surged since the Reserve Bank of Australia started raising its official cash rate in May 2022.

Battered borrowers may be salivating at the thought of falling interest rates, following Westpac’s announcement of interest rate cuts on fixed-rate mortgages.

It has joined NAB with fixed rates now below 6 per cent, while several other lenders have cut rates on more than 25 fixed rate products in the past week.

Home loan interest rates have surged since the Reserve Bank of Australia started raising its official cash rate in May 2022. Those 13 rises mean people now pay an extra $1500 a month in repayments on a typical $600,000 mortgage.

The vast majority of Aussie borrowers have variable rate mortgages, including those who came off ultra-low fixed rate deals struck in the early 2020s and moved onto much higher rates in the past year or two. This was called the mortgage cliff, and borrowers appear to have handled it better than many expected.

Today, average home loan interest rates are bouncing around 6.5 per cent for both variable and fixed rates of all durations – one to five years. The cheapest fixed and variable rates on the market are around 5.8-5.9 per cent, but we could see more fixed rates falling soon.

Variable-rate borrowers may have to wait a while longer, perhaps many more months, but that doesn’t mean now is the time to fix.

Why are fixed interest rates dropping?

Banks increasingly believe the next RBA rate move will be down, even though the RBA itself says it is still on the fence and will increase its rate in the coming months if inflation doesn’t fall fast enough.

Fixed rates usually reflect where banks think RBA rates will be in the future, plus what their competitors are offering. Bank boffins build profit margins in their fixed-rate offerings.

When will variable rates fall?

Only when the RBA begins cutting its official cash rate. Some say this may start before Christmas, but a majority of forecasters are talking about early-to-mid 2025. The RBA itself doesn’t expect to cut its cash rate this year.

Should I switch from variable to fixed?

There is no rush, unless you want to lock in the certainty of a fixed rate.

Both fixed and variable offer similar rates right now, and both are expected to fall further in the future when RBA rate cuts begin. Nobody likes being stuck on a 5.8 per cent fixed rate when everyone else is paying around 4 per cent.

How far will interest rates fall?

How long is a piece of string? Borrowers would love to see the RBA cash rate return to the super low 0.1 per cent it was during the pandemic, and the sub-2.5 per cent home loan interest rates that brought.

Savers and retirees, on the other hand, would hate to see their deposit interest rates slashed back towards 2 per cent – as they were for many years before 2022.

Economists do not expect super-low interest rates any time soon. The best that most borrowers should hope for is probably a 1 or 2 per cent reduction in the coming years. For both fixed and variable.

Originally published as Fixed mortgage rates falling but jury is still out on variable rate mortgage moves