Fixed-rate loans becoming more popular

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

A recent update from Commonwealth Bank showed that the share of fixed-rate lending has increased amongst owner-occupiers and investors.

Most banks are offering borrowers the opportunity to lock in two- or three-year fixed rate loans at rates between 2.10% to 2.5%. This is well below the banks' standard variable rates, which tend to range between 3.5% and 4%,".

The favorable interest-rate environment has increased the borrowing capacity of many mortgage holders, allowing them to afford bigger loan values. The "growing popularity" of fixed-rate home loans was due to the monetary policy stimulus package by the Reserve Bank of Australia (RBA) aimed at reducing the economic risks amid the pandemic.

Aside from lowering the cash-rate to an all-time low of 0.25%, the RBA also set a new target for the yield on three-year government bonds to 0.25%. It also provided banks with access to around $200bn three-year funds at the same rate.

Not surprisingly, the banks are making good use of this cheap fixed-rate funding to offer appetising interest rates to new home buyers, and to people refinancing their loans.

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

The popularity of fixed-rate mortgages means that the US central bank is boosting the spending power of consumers when its policies result in lower US bond yields.

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