Losing interest is cause for renewed interest

In the time between this article being conceived and written, pretty much everyone has already lost interest. 

And interest rate markets are pricing in a more than 50 per cent chance that they will have lost even more interest soon after publication.

The chance of another 0.25 per cent cut at the central bank's next meeting, on June 2, has now moved above a fifty-fifty call.

Bloomberg puts the chance of a 0.25 per cent cut at the central bank's next meeting at just above 55 per cent.

For mortgage holders and property aspirants, this presents a potential opportunity. Savers and self-funded retirees, however, have suffered further ‘pay cuts’ after the major banks slashed term deposit interest rates.

For borrowers, a wide gap has formed between interest rates for fixed and variable home loans. 

According to Canstar, the average three-year fixed rate is 2.8 per cent, and the average variable rate is 3.48 per cent for owner-occupiers taking out principal-and-interest loans.

Specialist Mortgage director of finance Helen Avis said competition between financial institutions was heating up.

“Everyone is shopping around and looking for the best deal,” Ms Avis told Australian Property Investor Magazine.

“With interest rates at record lows, with a cash rate of 0.25 per cent, there’s not too much room to go lower and banks have slashed rates.

“COVID-19 has not really put people off buying property, especially at the top end of the market.” 

Melbourne-based Ox Finance’s owner, Lachlan Haig, described the variable versus fixed decision as a balancing act to be determined by your repayment intentions.

“It essentially comes down to two things; one is certainty of incredibly low repayments and, in my opinion, it is difficult to see the rates getting much lower, and two is loan flexibility – many people I know have put themselves in fixed rates and then end up paying more because they are locked into a rate which is no longer competitive,” Mr Haig said.

“If my situation meant I could not see myself making any additional repayments on the loan, I would go with the fixed option due to historically competitive low rates and not having to be concerned about any fees if I make additional repayments.  

“If I wanted to make additional repayments and felt I could make some really good inroads to the loan, I would go variable.”

Negative charge

The difference between fixed and variable interest rates has grown in recent weeks as COVID-19 support measures take effect.

Average fixed interest rates have been lower than variable rates by about 30 basis points for the past five years. That difference has expanded by around 30 basis points to 84 throughout March and April, according to financial comparison website Canstar.

RateCity analysis meanwhile shows that 38 mortgage lenders have cut their interest rates on more than 500 housing loans since the last RBA meeting in April, despite no change in the official cash rate.

But with rates residing in the basement, the possibility still exists that they could descend into an even deeper cellar.

The Reserve Bank of New Zealand has outlined a plan to potentially take the New Zealand cash rate into negative territory as the economy stutters under the weight of pandemic-related shutdowns.

With negative interest rates, banks charge interest to keep cash with them, rather than paying the customer interest. 

Traditionally introduced to try and help revive a slow economy, the negative interest rate is meant to be an incentive for banks to make loans during a period in which they would rather hang on to funds.

The RBA has been vocal in its concerns about low wage growth, stagnant inflation, and spare capacity in the Australian economy, as well as global factors like ongoing trade disputes. These are conditions familiar to Japanese living with negative interest rates.

Ox Finance’s Mr Haig said negative interest rates appeared unlikely to eventuate in Australia, even in the event of a worsening economy.

“RBA governor Philip Lowe has made it quite clear 0.25 per cent, rather than zero, is the ‘effective lower bound,’ which suggests we are unlikely to go to zero or negative,” he said. 

“If employment is seriously impacted and the economy faltering, the RBA would likely choose quantitative easing to try and pump up the economy.”

Savings rates

Savers and self-funded retirees have suffered further pay cuts, with the major banks having swung an axe at term deposit interest rates.

Canstar reported there were 167 changes to term deposits last week, of which 164 were cuts, in a trend it said reflected ultra-cheap interbank lending rates.

Savers and mortgage holders alike are now scrambling to identify the most competitive interest rates, and the non-traditional financial institutions are attracting interest.

While lacking the brand recognition of the big banks, or even the smaller ones, Qudos Bank (1.90 per cent) and Firstmac (1.95 per cent) offer the most competitive rates on 12-month term deposits.

Mr Haig said consumers should definitely consider financing or banking through lesser players in the banking industry.

“If they have a banking licence, it’s absolutely worth looking at competitive deposit and borrowing rates outside the established banks,” he said.

“The smaller and digital banks are certainly offering some very competitive deals at present and the world is global and the internet provides the platform to do banking and mortgages, so if the other financiers have the systems in place to transact and do the majority of things a major bank can do, then I would 100 per cent recommend them.”