Some of the biggest swings since the COVID-19 pandemic have really grown fangs and bit Australia’s economy hard in the normally reserved realm of home loans.

If you had said a year ago that one in fourteen home loans would have deferred its repayment for six months with permission from their bank, people would have laughed.

But it happened very quickly with the Australian Bankers Association saying those 429,000 deferred mortgages amounted to $ 153.5 billion.

It has also been a very active time for refinancing, with Finder figures showing that March was a very strong month with over 26,000 loans worth about $ 11.5 billion refinanced.

This is up 8% from February and it would not be surprising to see that the refinancing wave accelerates, especially as the variability of rates within the mortgage segment becomes quite extreme and that households try to cut spending wherever they can.

Fixed mortgages much cheaper than variable mortgages

One of the driving forces behind this mortgage lending business is the Reserve Bank, which strives to dramatically reduce banks’ short-term funding costs by offering banks short-term loans at just 0.25%.

This lowered fixed rate home loans by almost 2%, opening up a wide gap with more traditional variable loans which still average around 3.5%.

Of course, fixed rate home loans which usually last around three years are not suitable for everyone as they lock you in if rates were to fall further and they do not have a range of facilities such as netting and withdrawing. have high breakage costs and generally do not allow additional refunds.

Fixed rate loans also do not reduce the amount of principal over the life of the loan, making them even cheaper in terms of repayment but less suitable for the longer term, as a loan with principal and interest pays off the loan. ready over time. .

However, at a time when every dollar counts and official interest rates seem to have reached the lowest level they can reasonably be expected to fall, the large gap between fixed and variable rates encourages a lot of activity, overcoming the downside of having to renegotiate another mortgage when the term expires.

The difference is obviously substantial with the largest fixed / variable spread of 0.84% ​​worth about $ 3,360 per year or $ 280 per month on a $ 400,000 loan, although the actual spread is probably a little lower than that.

Reserve Bank is the reason for low fixed rate home loans

The reason for the cheaper fixed rates was explained by the Reserve Bank which announced in March that it was providing cheap credit to banks through its term finance facility.

This stimulus package is worth $ 90 billion and offers a three-year funding facility to banks at a fixed rate of just 0.25% – so banks will still make a lot of money on those fixed loans.

The Reserve Bank minutes stated that this funding was “substantially less than the current funding costs of lenders,” which is one of the main reasons why such a large gap has opened up between loans to the Lender. fixed and variable accommodation.

Fixed rate loans could rise again after September

Cheap RBA loans are limited – banks are limited to funding up to 3% of their outstanding credit and loans are only available until the end of September, unless the program is extended.

Often times, homebuyers who take out fixed rate loans are dismayed when general interest rates drop while their rate remains fixed and they pay a rate that was good when they took out the loan, but failed. ‘is more competitive.

This may not be as much of a problem at the moment, with the RBA indicating that it has suspended official rates and is reluctant to go negative, which any significant move below. the current official rate of 0.25% would probably result.

So, there is a window of opportunity by September to get a cheaper than usual three-year fixed home loan that is unlikely to leave borrowers unhappy because they failed to pick the low. of the yield curve.

It seems that many cash-strapped Australians are jumping on this opportunity.