Increasingly Popular Fixed Rate Loans

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The low interest rate environment and the impacts of the COVID-19 pandemic on the finances of many Australians appear to have boosted demand for fixed-rate mortgages.

A recent update from the Commonwealth Bank showed that the share of fixed rate loans has increased among homeowners and investors.

“In fact, most banks offer borrowers the option of locking in fixed rate loans over two or three years at rates between 2.10% and 2.5%. That’s well below standard bank variable rates, which tend to be around 4%, ”said Karen Maley, columnist for the Australian Financial Review.

The favorable interest rate environment has increased the borrowing capacity of many mortgage holders, allowing them to afford larger loan values, Maley said.

Maley said the “growing popularity” of fixed-rate home loans was due to the Reserve Bank of Australia’s (RBA) monetary policy stimulus package aimed at reducing economic risks amid the pandemic.

In addition to lowering the cash rate to an all-time low of 0.25%, the RBA also set a new target for the three-year government bond yield at 0.25%. It also allowed banks to access about $ 200 billion in funds over three years at the same rate.

“Not surprisingly, banks are making good use of this cheap fixed rate financing to offer attractive interest rates to new home buyers and people refinancing their loans,” Maley said.

However, as borrowers take advantage of low rates, Maley said the RBA “will have to act with more caution” to reverse the monetary stimulus.

“The Reserve Bank will need to closely monitor short-term bond yields to ensure that a premature rise in yields does not hamper the purchasing power of households that have to roll over their loans,” she said. .

If the trend continues, Maley said Australia could potentially follow in the footsteps of the United States, where 30-year fixed-rate mortgages are the most popular loan product.

“The popularity of fixed rate mortgages means that the US central bank increases the purchasing power of consumers when its policies cause US bond yields to fall,” she said.

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