How low can a home loan go?

Interest rates for home loans are at all-time lows, with large and small banks and non-bank mortgage lenders racing to set new record lows. But with some economists forecasting that the Reserve Bank of Australia (RBA) could further cut the national cash rate at its October or November meeting, possibly into negative rates for the first time in history, what could this mean for paying off your house?

If you have a fixed interest rate…

…nothing much will likely happen for you.

Fixing your interest rate means that you’ll keep making the same interest payments for the duration of the fixed term, regardless of RBA updates or any other factors that may affect variable mortgage rates.

A lower cash rate could lead to mortgage lenders introducing cheaper fixed rate home loan offers. However, these will be available to new customers, with existing fixed rate customers not receiving a discount.

If you want to benefit from a lower interest rate, you may need to refinance your fixed rate home loan and switch to another loan. Of course, refinancing from a fixed rate deal could involve paying break costs, which could make refinancing cost more than it may be worth to you.

If you have a variable interest rate…

…you may be able to benefit from lower rates, though it’s not yet certain what kind of difference this could make to your wallet.

If the cash rate drops, banks and mortgage lenders often drop their variable home loan interest rates, sooner or later. This could allow borrowers to save a little money on their monthly payments, or to start paying off their properties a little bit faster.

It’s not yet clear quite how low home loan interest rates could go if the RBA was to cut the cash rate. Despite no cuts to the cash rate since March 2020, plenty of mortgage lenders have been recently slashing interest rates out of cycle from the RBA.

Recent analysis from RateCity’s database shows:

• 47 lenders cut new customer variable rates in the last two months.
• 34 lenders cut fixed rates in the last two months.
• Lowest variable rate is 1.89 per cent (60 per cent LVR).
• Lowest 2- and 3-year fixed rates are 1.99 per cent.
• 11 lenders offer rates below 2 per cent.

As well as cutting rates, some banks could potentially start slashing fees and charges (including LMI fees) or offering introductory bonuses and incentives, such as cashback deals.

Also, keep in mind that even if your mortgage lender gives you a discount on your home loan interest charges, this may not be the lowest variable rate they have available. Many banks and mortgage lenders offer their lowest rate deals to new customers only. If you want to reap the full potential benefits of an RBA cash rate cut, it could be worth looking at whether you’re in a position to refinance your loan, possibly with another lender.

What if the RBA goes into negative rates?

It’s possible that the RBA could choose to take Australia’s cash rate into negative figures, to help encourage Australians to borrow, invest, and spend money rather than keeping it in savings accounts or term deposits. While negative rates have been previously introduced to other countries in the past, such as Denmark, Japan, Sweden and Switzerland, this is largely uncharted territory in Australia.

A negative cash rate opens up the possibility for negative home loan interest rates, where a lender will effectively pay you to borrow money. For example, when Jyske Bank in Denmark introduced a negative rate home loan, when borrowers made their monthly repayments, their debt would be reduced by more than what they paid. Of course, there are still fees and other charges to consider and budget for with loans like these.

For savers, negative interest rates could potentially lead to a situation where not only do you earn no interest on the money you deposit, but you also need to pay fees and charges for keeping your money in the bank. This could potentially mean finding yourself with less money in your savings account than you started with unless you make regular deposits, which could be a tough situation for Australians who rely on savings, such as some pensioners.

RBA Governor, Dr Philip Lowe, has previously gone on record saying that negative interest rates in Australia are “extraordinarily unlikely”. However, it remains to be seen whether Australia’s recession and the ongoing effects of the pandemic could influence the RBA board’s future decisions.

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