How low can fixed mortgage rates go?

Fixed rates are all the talk in Australia’s mortgage market.

Over the past year, fixed mortgage rates have experienced far larger declines than variable mortgage rates, thus offering borrowers huge opportunities for savings.

As shown in the next chart, the average rate applying to existing 3-year fixed owner-occupied mortgages was only 2.20% as at January 2020, 1.45% below the average discount mortgage rate on existing owner-occupied variable mortgages:

The rate applying to new fixed rate mortgages are even lower, according to the RBA.

As shown in the next chart, a typical new owner-occupied borrower could expect to obtain a fixed rate mortgage at just 2.1% if they opt for a term of less than 3-years, or only 2.0% if they go for a term over 3-years:

Yesterday NAB joined the rate cutting frenzy, slashing some fixed mortgage rates below 2%:

NAB’s three-year fixed rate has been shaved by 11 basis points to 1.98 per cent, while its five-year fixed owner-occupier loan shed 55 basis points to 2.24 per cent…

“Both our three- and four-year fixed rates for owner-occupiers paying principal and interest are now below 2 per cent, a level that would have seemed unbelievable just a few years ago” [NAB executive Andy Kerr said]…

Some smaller lenders are offering even cheaper fixed rates:

The lowest three-year fixed rate advertised of 1.75 per cent is being advertised by NAB’s subsidiary UBank, while Homestar Finance offers the lowest variable rate of 1.79 per cent.

However, RateCity’s Sally Tindall believes we may be approaching the bottom of the rate cutting cycle:

“While we’re nearing the bottom of the rate cycle, provided the cash rates remains above zero, we could see one or two of the other big banks follow suit with some minor cuts in the weeks to come.”

I am less convinced that we are approaching the mortgage rate bottom. Much will depend on what the Reserve Bank of Australia (RBA) does with the Term Funding Facility (TFF).

Earlier this month, RBA Governor Phil Lowe said that the TFF is unlikely to be lowered, unless there is a “marked deterioration in funding and credit conditions”:

…the Term Funding Facility will be maintained as it is. Banks are able to draw on the facility up until end June, which means they will have the benefit of low-cost funding out to mid 2024. The Board would consider extending this facility if there were a marked deterioration in funding and credit conditions in the Australian financial system. At the moment, there are no signs of this.

One only needs to look across at Europe to see how the rates story is likely to unfold.

The European Central Bank (ECB) began with 0.1% funding for banks in 2014. By 2016 the rate had fallen to -0.4%. And now it’s -1.0%. So basically, the ECB will pay commercial banks up to 1% for every dollar they lend.

In fact, Denmark has already begun offering homeowners 20-year loans at a fixed interest rate of zero percent.

These developments could be a harbinger of what lies ahead for Australia.

Eventually, the TFF will likely go negative as the RBA chases mortgages with rates of 1% or less.

Unconventional Economist
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    • TW, they can take fixed rate mortgage to 0%, won’t make any difference to the meltdown later this year
      Prices will be starting to roll over mid year
      On top it’s going to be hard for the banks to lower so much if half have gone under by this time next year an it’ll start with the banks in Europe, a strong wind will nearly blow them over…..

      I was just thinking, if they have to merge or nationalise or what ever they come up with. I think the GOV owned bank should be called the Australian National Bank of Reusa, with the little pic on top of the bank with the TV advert saying “property always goes up, boom times ahead”:

        • I haven’t really said much on gold, in USD, It’s trending up, 15% correction, nice base around mid 1700s, bounced out 3 times, if dollar remains weak, , inflation is going to continue much higher. The next few years we are going to have a decade of high inflation much higher interest rates, so anything sensitive to interest rates rising like bonds and property will just keep going down. The USD is in major long term decline, DXY down to 50s or 60s. So gold and all other commodities will do well. The one issue will be the AUD, very longer term, we might spend a long time above parity, maybe up AUD1.20/ USD AUD1.50/USD, with AUD at 1.20 gold will be held back in AUD: you’ll need to hedge against AUD rising, gold silver copper food commodities will all be higher, even iron ore possibly $300 oil longer term well over $100

          So long term gold is really good, silver probably better, gold silver ratio has fallen from 1.25 to 0.65 and probably keep falling all other metals better I’d say relative to gold but still a good safe haven

          We are going to have a global banking crisis in 2nd half this year, so everything will initially fall like in the GFC, many global banks won’t survive along with many of ours won’t survive, so I’d prefer to have gold than a number in a bank that won’t even exist, guess it’s choice, USD rise for a period like always but then just keep falling

          If I had a choice I’d look at silver even platinum but they will all get hit in the financial crisis later this year into 2022 and will recover as the USD keeps falling we have a v long term commodities bull market ahead , governments will print HUGE amounts of money it’s the only way we will get out of the depression (unemployment may reach 20% ) we are headed into is to spend on infrastructure so commodities will be in strong demand the downside is high inflation and high interest rates possibly double digit.

          Gold is always good to hold in inflation, some say BTC etc are better, maybe but I like gold

          Anyway what’s your thoughts ?

          • boomengineeringMEMBER

            You are correct when you say it will happen quickly.
            Actually happens faster than you say .
            The 89 crash happened like one day, Saturday a frenzy the next cooled right down. That was WA, Talking to a RE agent at the Central Coast who came to work one day and as if someone turned the light off, no calls from then on.
            Seeing first and second hand what’s happening North of of Sydney it seems like it will happen in weeks/ months not later.
            The neighbor at the factory got guzumpted couple of days a go by a 10 percent higher offer, lots of vendors getting offers higher than asking price .

          • The more they do all these experiments the worse it’s getting, the global banking system is in real trouble, once a few go they are going to trigger the unwind of the derivatives market, I read it’s over a 1,000 trillion notional value, what a disaster.

            People have gone nuts buying property at all time lows in rates, this will continue and accelerate next few months then prices will start falling around mid yr. it’s these 20/30% price increase forecasts, RBA WBC AFR MSM

            Even construction costs are rising on top. Won’t be good in second half
            High AUD won’t help

          • boomengineeringMEMBER

            Living at Mosman in the early seventies met a guy who was buying units positively geared there.
            I put an offer on the cheapest place in Balgowlah mid seventies which I could barely afford but got guzumpted on.
            I just wish I could remember how long after that frenzy the crash came so I could correlate all my experiences of frenzy then crash timings.

          • boomengineeringMEMBER

            What’s your take on , cash, stocks, gold , or bonds.
            No doubt you’ll say physical gold’s the safe haven.
            A couple of one liners of your thoughts, in hierarchy much appreciated just to get alternative viewpoint. A lot of MB bears capitulating atm..

          • Many bears capitulating at the moment? Are you sure about that, boomengineering?

            Final mass capitulation of bears is a reliable indicator of the top of a market, just like final mass capitulation of bulls is a reliable indicator of the bottom.

          • Think yes all good
            For me anything that is exposed to high interest rates won’t go as well
            Value shares, not the shares where you are buying a dream
            Think we may head back to a period where things might make sense again
            I’m not as worried about having to hold physical now, too
            much government support, they won’t stop handing out but at a cost
            Don’t think we need to hide in a bunker

          • boomengineeringMEMBER

            It started with Gavin but lately a swath of MBers have had offers accepted. Luckily they are only lightly leveraged.

          • MountainGuinMEMBER

            Outside of finance alot of your grand solar minimum predictions are pannimg out pretty accurately. Weather being crazier than normal with the catastrophic Chinese floods, big freezes in the northern hemisphere with wobbles in the polar vortex – freezing geeman infrastructure, Texas and mid USA smashed and high winter crop losses, unverified stories Canada doesn’t have enough soy to meet export contracts and a few nations banning selected food exports die to domestic shortages. A few more big crop wipe outs and we’ll be in trouble

          • I haven’t looked as close, definitely weather affects everything
            The cooler period in solar min makes virus worse
            I said virus would subside now as we head up out of min into SC25
            Weather starts to become warmer virus will be gone

          • Strongly disagree !(respectfully). You got your base case wrong. Countries like Australia have absolute control over interest rate, CPI and exchange rate by means of printing, rig and capital control at all time. It’s up to the political will to choose what to do, who is the winner and who is the looser. I think saver and consumer will be the looser. We are heading towards Weimar Republic.

          • Strange EconomicsMEMBER

            Bears capitulating in housing? – There are no bears in Oz housing – never met one. The best indicator of the top is when FOMO conversation infects BBQs and the lone Macrobusiness reader there gives up and buys.
            So now its panic FOMO to avoid the 20 % up by June. Pity you can’t buy and sell houses like shares.
            No BBQs any more in Oz anyway, so no focus groups. Everyone else all bought years ago and too busy paying for their new SUV from their capital gain to talk about mortgages any more.

      • boomengineeringMEMBER

        This is the problem with listening to economists. They always predict what should happen according to logic and mathmatics. If we all did that we would have worn out the Kosiosco track by now. Psychology and stupidity needs to taken into account so lower than Lowe could mean a trigger to dive in or watch the lemmings.

          • boomengineeringMEMBER

            Not unlike those giant waves I used to catch by myself many kilometers out to sea. 1% chance of survival, Take the drop, hope for the best, and deal with all the unforeseen, chop, wind and unpredictability as they arise. No modeling of any waves, they are all different.

        • Boom I do think interest rates shorter term will go much lower as run to safety in bonds but they’ll print $20 trillion because they don’t know anything else and inflation and interest rates will rise even faster than now. MMT printing borrowing by selling issuing bonds all drive interest, if you’ve been around in the 70s you know that interest rates will go lower and RBA probably will keep cash rate low, won’t make any difference. You know my call on banks but regardless there will be big consolidation higher interest rates even from credit risk when very few can pay these trillions back.., think Matt commyn is already really worried, I think he’s a smart guy

          • happy valleyMEMBER

            Is that why he’ seems to have had a hair colour done to get rid of the grey stress hairs? Certainly, pocketing millions every year would be stressful (not)?

          • boomengineeringMEMBER

            bcnich and Happy Valley, nothing to be sorry about.
            Both inadvertently right for me, either way in the seventies as I’m in that age group but have no grey to dye like your subject Matt..
            btw bcnich your predictions of lower interest rates is a red flag to get the hell out of cash. Hope the MB fund is in tune as heavy on bonds.

  1. Episode 99

    Disclaimer: All characters and events in this Episode – even those based on real people – are entirely fictional. All celebrity voices are impersonated…..poorly. The following Episode contains coarse language and due to its content it should not be viewed by anyone.

    Not so long ago in a galaxy not so far away …..

    Darth Sidious: A Chinese-led mining boom will take off in a few years. We should capitalize on the coming boom and concentrate ever greater fractions of the Strayan wealth into our hands.
    Darth Howard: As you wish.
    Darth Sidious: The incoming large sums of effortless money will multiply the Moron Side of the Force. Steve Keen and his buddies will be no match for you.
    Darth Costello: We will lower the nominal tax rates and direct the state governments to fund their expenditures from the rising stamp duty receipts. The stamp duty is the only tax the voters are willing to pay.
    Darth Sidious: Do not forget to encourage borrowing and speculation. Higher house prices alone won’t help if the number of transactions stays low.
    Darth Costello: As you wish.
    Darth Sidious: Proving better government services while cutting taxes. You shouldn’t have any trouble selling it as a testament to your responsible economic management of the nation.
    Darth Costello: As you wish.
    Darth Sidious: The gullible Strayans will mortgage their paper profits to fund their overindulgence like overseas travels and cruises.
    Darth Costello: But Master, wouldn’t the resulting CAD make even greater fractions of our assets end up in the foreign hands? The foreign creditors have not been stupid enough to keep their proceeds in the rapidly debasing AUD.
    Darth Sidious: You must help them learn how to become stupid. Perhaps you can open the gates and encourage them to mingle and learn the Strayan way of doing things. But don’t forget to stop the boats and make sure the media are there. You cannot afford to look like an irresponsible keeper of the boarder.
    Darth Howard: As you wish.
    Darth Costello: Master, what should we do if a large faction of the population overstretch themselves and fail to service their debts?
    Darth Sidious: Then you must debase AUD still further. Keep printing just enough so that you won’t let them live and you won’t kill them either. After all, unlike Greece and the others in the Euro zone, you can print as much as you like.
    Darth Costello: Print as much as…… Master, is it legal?
    Darth Sidious: I will make it legal. I already directed Darth Greenspan to prepare his jurisdiction for the debasement. One of his underlings came up with a fancy name that tends to mask its real nature; quantitative easing – I will have him succeed Darth Greenspan in due course. You just need to follow what is going to transpire over there.
    Darth Costello: As you wish.
    Darth Sidious: The voters will scream if we cut their pays but they will be happy if their nominal income keeps rising. You just need to keep reminding them that their pay checks are not denominated in the Zimbabwean dollars.
    Darth Howard: As you wish.

  2. Crazy. We’re about to fix for 4yr at 1.99 which I was not sure on. Brother in law said, what, they go to 1.5, what are you going to do , slit your wrists?

    But rates at 1%? What would play out there? TFF at negative 0.5? Didn’t someone here say apra had sounded out the banks’ treasuries on preparedness for negative rates ?

    • If the fixed rate is lower than the variable the banks think rates are going down. I only have a few pieces of anecdata on that but they’ve been right every time it mattered to me.

    • PlanetraderMEMBER


      A mate told me APRA contacted banks etc about negative rates – i have since read it was to ask whether their IT systems were prepared to handle it. I think RBNZ also asked.

    • Strange EconomicsMEMBER

      So after they introduce the Irresponsible Lending Laws (ILL) bill and interest rate is zero,anyone can borrow 8 million even gig workers and live in a waterfront mansion. There is no ceiling to the boom. 20% up by June not waiting for 2 years.

    • What you lose in ‘overpaying’ on the interest repayments, you will more than recover in the house price appreciation linked to the drop in rates.

  3. Fixed rates will continue to fall even without further RBA action as most of the rate is made up of bank margin. Banks have accumulated higher capital levels through last year due to the a COVID crisis and being prevented from paying a full dividend last year. They haven’t had the bad debts they were fearing eventuate therefore have excess capital. They will need to lend and will fight each other for market share in the year ahead. Expect to see fixed rates continue to fall as this dynamic of competition plays out. Could take us to sub 1.5%.

  4. I dont know. Seems to me that a 300 pound gorilla sitting on the 3 yr will put up a fight against a bear (sharemarlet wobbles) and even an elephant (housing market wobbles) but even a gorilla could end up having a different response to a thing called forest fire, inflation.
    Sure theyve been banging two rocks together for the last decade to get any sparks flying but it is a nasty thing to control once it gets going. So do they snuff the fire out now or fan it and risk it? sure is smelling smoke…

    “The RBA did less than the market expected on Monday, so are they serious about maintaining that line in the sand?” Mr Bovingdon asked.

    The RBA bought the bonds at a yield 0.125 per cent, above its 0.10 target.

    Yields drifted as high as 0.14 per cent during Monday’s volatility, as investors dumped bonds and bet on inflation returning sooner.

    The three-year yield settled at about 0.12 per cent on Tuesday, still above the RBA’s 0.10 per cent target.

    The RBA now owns almost half of the $33 billion of April 2024 federal government bonds on issue.

    The 10-year bond yield rose to 1.65 per cent for the first time since May 2019.

    The Australian dollar had edged above US79¢.

    Earlier this month, Dr Lowe said the 0.10 per cent interest rate would not increase until 2024 “at the earliest”, a shift from previous guidance that there would be no rate rise until “at least” three years from 2020.

  5. pfh007.comMEMBER

    The RBA can do whatever it wants but keep in mind it’s objective is to keep its key stakeholders (the banks) healthy, wealthy and a bit thick.

    Otherwise it could simply support a specialist FHB mortgage lender that offers mortgages to FHB at 0.1% and funds the loans and operational costs by selling bonds to the RBA.

    But as the RBA loves its merry band of debt peddlers, it will buy their bonds and leave it up to the banks to decide how much sugar to leave on their snouts. They compete you know!

    A broken and dysfunctional public monetary model and a banker monopoly of RBA deposit accounts is the core of the problem but we don’t do reform of banks in Australia.

    The usual side issues and economic trivia is about the best we can hope for.

  6. Arthur Schopenhauer

    Hocking yourself to the greatest extent possible, may become the equivalent of buying bitcoin in 2011.

    • Not so much for OO/P&I. How do you unlock the capital. Tap equity? Then what? Buy an IP? Sure, maybe. Me, I’d want a +vely geared IP, and good luck with that with prevailing prices (some pocket exceptions notwithstanding). Stock market?

      OOs aren’t going to just sell – what then?

      Might suit IPs.

      All of which to say, I’d probably preferred to have jumped in BTC than property….Mate told me to buy at 700. Oops. He bought lotssss.

  7. Forgive me but how is TFF going to meet its future payment obligations to public servants if it keeps giving money away?

  8. Display NameMEMBER

    “In fact, Denmark has already begun offering homeowners 20-year loans at a fixed interest rate of zero percent.”

    Do banks really exist in this environment? There is no net interest margin. At some point someone has to call BS on this.

    • Did you read the article?
      “By 2016 the rate had fallen to -0.4%. And now it’s -1.0%. So basically, the ECB will pay commercial banks up to 1% for every dollar they lend.”
      That is a 1% margin. Unless you mean the Central bank, but margin is irrelevant then. They create the money for and from nothing.

      • Display NameMEMBER

        Its a bit like the quantum mechanics of finance. Negative rates do not make sense if fiat is a store of value. We will pay you to give this money away. But its a store of value. Maybe.

        • Fiat has never been a very good store of value. Low inflation just make it more obvious in nominal terms…

          • Strange EconomicsMEMBER

            Unfortunately Fiats were great cars but the problem was all rusted away in months. They used cheap Russian steel (an early Russian plot).

    • boomengineeringMEMBER

      Display N
      Interest margin is derived from depositors paying to leave money in bank in Australia as well as CB. Theoretically they could have a profit margin at any negative rate. This besides bail ins is why I put in a submission to our federal Parliament opposing cashless society locking in depositors.

  9. You can’t compare Danish banks to Australian, it’s an apples and oranges comparison. Danish banks do not operate the same way as ours. They don’t take deposits or raise capital to fund loans. All mortgages are funded by issuing matching bonds to investors, and they just charge a fee for the matchmaking. So the actual rates are almost irrelevant to the bank.

    • And wouldn’t the country that matters the most outside of Australia be the US? I can’t see the Fed Reserve going negative.

  10. If I recall Marx’s theory of Capital correctly
    The primary purpose of organized Financial Capital was to induce our Social and Human Capital to self organize into Productive groups.
    Financial Capital has a positive value because well organized Labour delivered significantly greater productivity than disorganized Labour.

    Hmm so what does this imply if, as a society, we’re discovering that we need Negative Interest rates?
    Are we socially creating the economic foundations for Labour to become Disorganized and Unproductive?
    Have we decided to reward this shift of Labour towards Disorganization?
    It’s confusing, to say the least, but fortunately Marx addressed this dysfunctional corner about 150 years ahead of Capitalism. In a way, with what is happening, we are proving Marx’s Theory of Capital in much the same sense as Gravitational waves proved Einstein’s General theory of Relativity.
    It’s an exciting time to be a Marxist.

      • If you think Marx had some crazy ideas about negative Interest rates you aught to read some of the Structured Product proposals that I’ve recently reviewed.
        The proposals make perfect sense while at the same time being complete nonsense.
        I often feel the need to step in and bring us back towards sanity but I resist this urge because insanity is just so damn profitable.

  11. Those fixed rates at 1.99% typically have a comparison rate in the 3s so not so special.

    My variable loan (signed this week) is 2.19%, which is completely farken insane – and yet it could conceivably go lower. Madness.

    Get into it.

    • Welcome back

      Good point – our CBA revert rate is 2.6 variable. Befor expiry you have a discussion about what happens next. Even the banks say they don’t expect you to revert to the std variable

      Who’d you go with

      • Thanks Swampy, hope you’re well.

        We used Pacific Mortgage Group brokers (online only brokers) and the loan is with Bendigo and Adelaide Bank, it’s a 2.09% rate (comparison rate 2.19%) only available through brokers.

        Bought a nice house on 950m2 of land in an inner Canberra suburb, plenty of established trees, space for chooks and veges. Just what we wanted. Very happy. Just don’t ask about the size of the loan! 😂

    • “Home loan comparison rates are calculated based on a $150,000 loan, over a 25-year loan term. ”

      Fees effect the comparison rate disproportionately for typical loan values. A value of 500,000 would bring that comparison rate down a lot.

  12. “NAB’s three-year fixed rate has been shaved by 11 basis points to 1.98 per cent”

    With a comparison rate of 3.83%, almost double!

    A little more skepticism of the real estate spruikers at News Corp is required.

  13. Is this not now encouraging people to take out even more debt via second mortgages to buy assets like IP’s, stocks, Bitcoin, etc? I mean, if you can get secured finance you would be mad not to, right? More asset inflation coming. If you play it right and don’t get sucked into thinking there isn’t going to be another crisis somewhere down the line, it is a good opportunity.

  14. Leith good points raised here.
    My concern is that if rates go too low this could shrink bank profitability so low that there’s no margin for bad debts?
    Then the banking system implodes like in Europe or Japan (see their banking Price/Book ratios compared to CBA!)
    Any indication of the approximate costs of administering mortgages in bps?