The cheapest home loan interest rate in Australia as banks slash rates

Australian borrowers tempted by lower fixed rate mortgages should not jump in too soon, amid predictions of even better deals on offer in 2025.

Macquarie Bank on Thursday slashed its two and three-year fixed rates by 20 basis points to 5.39 per cent – now Australia’s lowest mortgage rate outside of a green loan.

Four and five-year fixed rates were cut by an even more dramatic 40 basis points, also to 5.39 per cent, for borrowers with a 30 per cent mortgage deposit.

Macquarie’s fixed rates are significantly lower than its most competitive variable rate of 6.14 per cent.

But their lowest fixed rates are not much lower than Australia’s lowest variable rate of 5.75 per cent offered by Abal Banking, a subsidiary of the Arab Bank.  

All the major banks are offering variable rates starting with a ‘six’ and fixed rates beginning with a ‘five’ – inundating borrowers with tempting offers in recent months.

Financial markets are expecting the Reserve Bank to cut the cash rate four times next year from an existing 12-year high of 4.35 per cent.

But before signing on to a lower fixed rate, borrowers need to be aware they could be missing out on even better deals in 2025.

They will face fees in the tens of thousands of dollars if they change their mind about fixing their mortgage rate as the variable rates drop ever further.

Sally Tindall, Canstar’s data insights director, said fixing a mortgage rate now was still a big gamble, considering the banks were likely to still slash both their fixed and variable rates.

‘For someone who’s looking to pay as little interest as possible, it’s a gamble because we just don’t know what the cash rate and what mortgage rates will do within the fixed-rate term,’ she told Daily Mail Australia.

‘Once you lock in, you have to ride out that fixed rate.

‘Often you can be up for costly break fees because the bank will lose money as a result of you breaking the contract and they are able to charge you for any loss that they might incur,’ Ms Tindall said. 

The 30-day interbank futures market indicates rate cuts should start in February next year, and has priced in four Reserve Bank rate cuts in 2025 that would take the cash rate down to 3.35 per cent for the first time since March 2023.

The Commonwealth Bank is even more optimistic, with its head of Australian economics Gareth Aird forecasting five rate cuts by late 2025 that would take the cash rate down to 3.1 per cent for the first time since February 2023.

Sally Tindall, Canstar’s data insights director, said fixing a mortgage rate now was still a big gamble, considering the banks were likely to still slash both their fixed and variable rates

The generous rate cuts being predicted in 2025 won’t undo the RBA’s 13 rate rises in 2022 and 2023 that were the most aggressive since the late 1980s.

But they would mark the biggest relief in one year since June 2019 to March 2020 when rates were cut by 125 basis points during the bushfires and the start of Covid. 

‘As we inch closer to a cash rate cut, we are expecting more fixed rates to come down,’ Ms Tindall said.

‘Over the last three months, it has literally been raining fixed rate cuts.’ 

Fixed-rate mortgages made up less than 2 per cent of new and refinanced mortgages in July, Australian Bureau of Statistics data showed.

This was well below the all-time high of 46 per cent in July 2021 when the Reserve Bank cash rate was at a record-low of 0.1 per cent and banks were offering fixed mortgage rates starting with a ‘two’ or in some cases a ‘one’.

‘At this point in time, fixing is completely on the nose with borrowers – the future is still highly uncertain,’ Ms Tindall said. 

‘People are opting to stay on a variable rate because the consequences of getting that wrong, in their mind, is less risky than locking in a fixed rate only to see variable rates plummet and them being on an uncompetitive mortgage rate, particularly when a mortgage is, for many families, the biggest monthly expense.’

The 30-day interbank futures market is expecting the rate cuts to start in February next year, and has priced in four Reserve Bank rate cuts in 2025 that would take the cash rate down to 3.35 per cent for the first time since March 2023

Lower wholesale funding costs also mean the banks can keep cutting their variable mortgage rates as the RBA eases monetary policy, with underlying inflation tipped to fall within its 2 to 3 per cent target by the end of 2025. 

Those considering fixing their mortgage rate need to remember what happened in early 2008 when interest rates rose twice, to a 12-year high of 7.25 per cent, only for the RBA to slash rates six times from September 2008 to April 2009.

This more than halved the cash rate to 3 per cent – sinking to levels then unseen since the 1960s – as the RBA embarked on super-sized 100 basis point cuts in October, December and February.

Those who fixed their mortgage rate at 9 per cent got burnt as the Reserve Bank slashed rates to stimulate the economy during the Global Financial Crisis. 

‘It was one of the many reasons why Australians aren’t big fixers – a lot of people locked in their rate just before the GFC because they thought that interest rates were going to start climbing and they locked in what ended up being a very high fixed rate only for the GFC to hit and the cash rate started plummeting,’ Ms Tindall said. 

Variable rate borrowers, however, need to also be aware that the major banks in 2020 did not pass on the RBA rate cuts in full.

But they can always negotiate a better deal even before the rate cuts begin.

‘A lot of borrowers will decide to stay on a variable rate but know that that variable rate is, by definition, negotiable so if you want to get rate relief in 2024, pick up the phone to your bank and haggle with them,’ she said.