Commonwealth Bank Cuts Fixed Rate Home Loans Adds Confidence to the Property Market

The Commonwealth Bank, Australia's foremost mortgage lender, has substantially reduced its fixed-rate borrowing costs, further invigorating the post-Easter residential market which is experiencing growth at a rate exceeding many analysts' predictions.

Recently CBA reduced its 3-year fixed rate packaged loan by 0.4 per cent for both owner-occupiers and investors, resulting in rates of 5.59 per cent and 5.69 per cent respectively. This follows similar reductions by 15 smaller lenders and non-banks in their fixed mortgage rates over the past fortnight.

The bank's lower fixed rates, which pertain to a $537.6 billion housing loan book, will encourage additional buyers, reinforcing the belief that the housing market—predominantly concentrated on the east coast—has reached its lowest point. This is further supported by factors such as increased immigration, a higher volume of listings, and better-than-anticipated auction clearance rates observed in the previous week.

Prospective buyers will be reassured and more confident in their purchasing decisions, which in turn will inject this confidence into the broader housing market.

Although a cut in interest rates by the Reserve Bank of Australia would yield a greater impact in fuelling demand, the current fixed-rate reductions by lenders, coupled with this month's pause in rates, are sufficient to stimulate buyer interest.

This newfound confidence allows investors to better estimate the cost of their investments, as fears that interest rates could surge to 10 per cent have subsided.

The stabilisation of rates has boosted sentiment among previously hesitant investors. In recent months, the RBA's consistent rate increases made it difficult for investors to determine their cash flow, but the cessation of these increases, at least for the time being, has bolstered confidence. Further rate reductions are anticipated next year.

Nonetheless, these changes will not yield a drastic impact. The reduction of certain fixed rates has made them more competitive relative to variable rates, reinforcing the notion that the benchmark lending rate has peaked or is approaching its zenith.

While fixed-rate costs will likely lead the mortgage market in its descent as they have in the past, it may take a year or more for variable rates to decrease. In the meantime, falling rates on fixed mortgages will broaden the options available to homeowners and investors, allowing borrowers to safeguard against further substantial rate increases.

Despite these options, borrowers may still face elevated borrowing costs, particularly when fixed rates expire and rise from low 2 per cent to mid 5 per cent. This substantial increase will affect those who choose to refinance or shift to variable rates.

Smaller lenders, including Macquarie Bank, Adelaide Bank, and Bank of Queensland, have already reduced their fixed mortgages by up to 0.6 per cent, while Credit Union SA has implemented the most aggressive cut with a 1.66 per cent reduction.

The CBA's decision to reduce its fixed-rate loans is particularly noteworthy, as it suggests that other major banks may soon follow suit with a decrease in their three-year fixed rates. This indicates that interest rates are not expected to rise as high or persist as long as previously anticipated—an encouraging development for homeowners and investors alike.