Fixed rate home loans at the tipping point for good value

Fixed home loans are no longer out of the market – at least, according to the Mozo database.

Over the last year, home loan interest rates have increased by 3% - 4% for variable home loans, thanks especially to the Reserve Bank of Australia. 

Many customers hoping to avoid the hikes by fixing haven’t had much luck finding deals better than the average variable rate. Many more are still (rightfully) wary of fixing given that the rate cycle is closing. After all, the next major market change is likely to be a cash rate cut in 2024. 

However, fixed interest rates are predictive. Now that lenders sense rate hikes are over, some of the fixed offers in Mozo’s database have ticked down and tipped back into competition. Could home buyers find better value by fixing their interest rate?

The main difference between fixed and variable home loans is the interest rate. Variable rates rise and drop at the lender’s whim during your entire loan term, while fixed interest rates stay the same for a guaranteed period.

To help draw customers, lenders usually offer more competitive features on variable home loans than fixed ones, especially interest-saving features like:

• Offset accounts to store your savings
• Free extra repayments to pay down your loan sooner. 
• Easier refinancing – the break cost of ending a fixed term early can be enormous.

For a fixed rate to be good value, it has to beat the competition’s interest rate and offer the sweet spot between financial security and good features. A variable interest rate home loan can be better if it could save you more money – and vice versa for the fixed rate. 

Currently, the average variable interest rate for owner-occupiers making principal and interest repayments is 6.61% p.a. in the Mozo database – the lowest is 5.54% p.a. 

Now let’s compare this to the best and average fixed interest rates by term. 

Average fixed interest rates by home loan term (18 September 2023)

^^Taken from Mozo’s database of P&I OO home loans, current as of 18 September 2023.

As you can see, the rates are roughly comparable between fixed and variable home loans, with fixed rates just slightly lower. A rate difference of 5 - 50 basis points – while seeming small – can add up over time, as shown in Mozo’s switch & save calculator.

However, given that the cash rate is predicted to drop in the next year, it becomes a question of timing. Which type of rate will drop first, and fastest? And is it worth fixing for a few years when variable rates might cut in that time?

Mozo banking and rates expert Peter Marshall says it still comes down to borrower preference. However, fixed rates will likely win the race to cut first. 

“I think if economic indicators remain reassuring for the RBA over the next couple of months, we’ll see rates starting to drop before the end of the year,” Marshall explains.

“So, another two months or so, and it’ll be a torrent of fixed rate cuts. There are reasons to be optimistic if you’re a home buyer at the moment. Just hold on a little longer, and fixed rates will become more favourable.”

Especially now that the home loan rate war is over, the appeal of opting out of the chaos by fixing can be strong. But remember, it’s about chasing value, not necessarily lowest spend  – although low monthly repayments is certainly a reason to look twice at a home loan.

Thinking of fixing? Compare some of the hottest fixed offers tracked by Mozo in the table below.