Video: Interest rates hold! August RBA Wrap, RateCity News

The Reserve Bank has left interest rates on hold at 2.5 percent at its August meeting, 12 months since the last rate cut and almost four years since the last rate increase.

Laine Lister is joined by Alex Parsons, CEO of RateCity.com.au to discuss what this means for home borrowers.

Alex, the Reserve Bank has not moved interest rates for a year, but that hasn’t stopped banks slashing the cost of fixed rate mortgages. Borrowers can now lock in an interest rate of less than five percent for up to five years.

The banks have brought out their five year fixed rate at 4.99 percent, so effectively for a minimum of five years really. It is interesting that despite no changes in the RBA cash rate we have seen the banks move out of cycle which I think is very encouraging for borrowers and I don’t think the RBA is going to drop their rates significantly more and so these are interesting products.

4.99 percent – it’s a sharp rate and the lowest five year fixed rate we’ve seen. Should borrowers be thinking about fixing?

At the very least, borrowers should review their current situation. If their current situation has them on a rate which starts with 5 they should absolutely get in there and see – 4.99 percent fixed for five years gives you a lot of certainty at a very cheap rate.

What borrowers need to also understand is that you don’t have to fix 100 percent of your loan. You can have a foot in both camps. I suspect a lot of people really don’t know that today. So my advice is if you start with a five get out there and find a better rate – there are rates available from the big four at 4.99 percent – they are very sharp, they are very attractive rates.

Are there any downsides to fixing your home loan?

There are downsides, the down side to fixing your home loan is that you are fixing and so really you are stuck on that rate for that period of time. The other downside is that if you receive a windfall – perhaps a bonus at work, an inheritance, or you win the lottery – you’re unable to pay down your loan faster on a fixed rate, without incurring a fee. So there are a couple of downsides that people need to be mindful of.

However, there are a lot of upsides and the primary upside is certainty. You know how much you will pay for that period of time and in a climate whereby things do change that certainty does provide a lot of certainty for a lot of Australians across the country.

Recent research shows that the number of borrowers defaulting on their home loans is on the rise. Are some borrowers getting in over their heads?

The Fitch research does show that over the last six months arrears have risen – we are seeing that in some of the outer suburban areas I think people have really maxed out their borrowing capacity. People do want to be wary of interest rates being at record lows. My belief is that over time there is one way for these rates to go and that’s up.

So my clear message to borrowers is even in times of cheap money such as today make sure you can withstand a 2 percent increase in the interest rate and still be able to afford those repayments. That’s something people really need to understand so they don’t find themselves in mortgage stress if or when rates do increase.

So as we’ve said, rates on hold at 2.5 percent and some great tips there for borrowers considering fixing their home loans. Thanks to Alex for joining us and we’ll check in again next month.

Compare home loans in Australia