How low will mortgage rates go?

With economic conditions around the World deteriorating, it is likely there are more cuts to come as the RBA pulls out all the stops to try to avoid Australia dipping into recession. A big ask, but not impossible.
While that is good news for borrowers, experts who research the lenders say that even bigger savings can be made by shopping around with other lenders.
While going to a mortgage broker is convenient, be careful because they do not always offer the best deals.
Consumer watchdog Choice recently shopped around on behalf of three borrowers. It found the best deals came through switching to mortgages offered by credit unions and the online lending channels of the big banks. However, these deals were not always offered through mortgage brokers. Choice found credit unions and building societies have, on average, "lower variable interest rates and lower fees than the Big Four banks".
Frank Lopez, an analyst with researcher Cannex, says those who took out fixed-rate mortgages before the middle of the year when the expectation was for rate increases would be kicking themselves now rates are falling. "Borrowers on fixed rates likely face huge break costs if they want to get out to take advantage of further possible rate cuts," he says.
They need to carefully consider whether the savings in interest rates will outweigh the break costs.
With interest rates likely to fall further, choosing variable rates looks like the better option.
MORE FOR THE MONEY
Markets are pricing in rate cuts that will take the cash rate to 3.75 per cent during the next six months.
The Reserve Bank has indicated it is prepared to cut even further to head off the worst of the global financial crisis.
AMP Capital Investor's chief economist Shane Oliver says the cash rate will most probably reach a low of 3.75 per cent by September next year but the Reserve Bank may have to cut even more.
"Unfortunately, it now looks like we are on the way to a mild recession," Oliver says.
"The threat to growth domestically is far more significant than was the case when interest rates were lowered to 4.25 per cent in 2001, which was the last low for interest rates."
CommSec chief equities economist Craig James is expecting the cash rate to be cut by another 0.25 percentage point next month. The Reserve Bank may then "sit back and see what the impact is on the economy".
He says the Reserve Bank may have to reduce rates again next year and the cash rate may have to be cut to 4.5 per cent.
"The speed of developments has taken everybody by surprise," James says.
"Midyear the Reserve Bank still thought that the next move in rates would be up rather than down." However, it is possible that things could turn up just as quickly as they have turned down. But don't bet your mortgage on it.

Mortgage shoppers delight in variable rate mortgages, fixed rates are for losers

Fixed-rate mortgage borrowers face hefty fees if they want to switch to a standard variable loan. A massive interest rate cut lastweek has made more than 43,000 fixed rate home loan borrowers Australia's biggest losers.
The costs of exiting an average fixed-rate mortgage jumped to $18,000 because break fees for the loan rise as interest rates fall.
Banks charge break fees to exit fixed-rate home loans so they can meet interest payment obligations to term deposit customers.
The Reserve Bank of Australia (RBA) on Tuesday announced it would slash official interest rates by 100 basis points point to a six-and-a-half year low of 4.25 per cent.
The 43,632 borrowers who opted for fixed-rate mortgages between March and August this year, when interest rates were at a decade-high peak, face hefty fees if they want to switch to a standard variable loan.
Official interest rates would have to fall to the lowest levels since February 1965 for these borrowers to recoup the cost of switching out of a fixed loan through cheaper mortgage repayments.
A borrower who took out an average $250,000 loan, fixed at 9 per cent for three years back in June, faces an $18,000 exit fee if they want to move into a standard variable loan.
Leaving an equivalent $400,000 loan would incur a $29,000 charge, according to Canstar Cannex data of exit fees charged by the major banks.
Canstar Cannex senior financial analyst Harry Senlitonga said lenders typically charged higher "break fees" to exit fixed-rate loans when official interest rates were falling.
"The more the interest rate cut, the more the break cost," he said.
"For a borrower, the question they need to ask themself is how long you have left on a fixed-rate and whether it's worth paying the fee or not."
Borrowers who took out a fixed-rate loan in August would face higher exit fees than those who took out a mortgage in March, when the RBA was still talking up inflation as its biggest worry.
Two of Australia's big four banks matched the RBA's one percentage point rate cut, which took the overnight cash rate to 4.25 per cent.
Monthly repayments on a $250,000 standard variable home loan with the Commonwealth Bank and NAB fell to $1,678 as mortgage rates dropped to 6.74 per cent.
By comparison, borrowers on an equivalent 9 per cent fixed rate loan are still paying $2,058 a month.
Switching from a $250,000 fixed-rate to a lower standard variable loan would reduce mortgage repayments by $13,680 over three years at current interest rates.
Borrowers would only recoup the $18,000 cost of exiting an average, three-year fixed-rate loan if official interest rates fell by another 75 basis points to a 44-year low of 3.5 per cent - and took standard variable mortgage rates to under 6 per cent.
After this week's rate cut, a one-year term deposit account with a rural bank was offering 6 per cent interest on $1,000, updated figures from termdeposit.com.au say.