At the big four banks, 1-year fixed rates are now at 3 percent, 2-year fixed rates are around 4 percent, and 3-, 4-, and 5-year rates are well over 4 percent — reaching 5 percent in some cases.
As a result, Australians are increasingly jumping off the fixed rate bandwagon. In a return to a more normal state of affairs, the proportion of new loans with fixed — as opposed to floating — interest rates fell to 28 percent in February after peaking at 47 percent in July last year, according to Canstar finance expert Steve Mickenbecker.
“The days of fixing interest rates, at least for the big four banks, seem to be behind us. NAB’s popular three-year fixed rate is now 2.3 percentage points above the lowest floating rate.”
To make committing to that rate a good idea, you would have to believe an aggressive campaign of official rate hikes is underway, says Mickenbecker.
“Borrowers with a strong aversion to rising repayments and expecting a very high Reserve Bank cash rate three years or so may still see value in sticking with the NAB five-year fixed rate, but at 4.99 percent – 2.8 percentage points above the variable interest rate – that will be a small minority.”
On the Canstar website, six lenders still advertise adjustable rate loans below 2 percent for borrowers with a loan-to-value ratio of 80 percent or less.
Basically, we’re back to the more usual situation where fixed interest rates are higher than variable interest rates. Traditionally, this happens because borrowers are willing to pay a premium for knowing what their repayments will be over a period of time.
The risk is that borrowers may now pay too high a premium to fix them compared to what is likely to happen with variable rates.
Of course, no one knows what will happen to variable rates. Most economists are predicting about four official increases in cash rates by Christmas, with the rate moving from 0.1 percent to about 1 percent by the end of the year. Depending on who you ask, they expect the cash rate to continue rising to 1.5 to 2 percent next year.
Financial markets are much more fearful and futures markets are betting that cash will hit 3 percent next year.
Loading
Recent fixed rate loan offerings appear to be pricing these aggressive rate hike market expectations. However, I would be very surprised if that happened.
Mortgage rates have skyrocketed in recent years, meaning that the same percentage change in interest rates is doing far more harm to households in dollar terms.
The Reserve Bank will do what it sees fit to deal with inflationary pressures, but governors know that punters and tabloid editors — and some gentler journalists like myself — will wait with bricks if they push hard too fast.
Hedging your mortgage rate is always a gamble. You could be right and get a bargain – or you could end up paying more. Only time can tell.
If payment security is important to you, check this out. However, fixed rate loans also come with a number of disadvantages, including the lack of a mortgage clearing account, limited ability to make back payments within the fixed term, and potential disruption costs should you wish to switch lenders.
Before you commit to new, higher fixed rates, you should look around for cheaper fixed rates and variable rates.
- The advice in this article is general in nature and is not intended to influence the reader’s investment or financial product decisions. You should always seek your own professional advice, taking into account your personal circumstances, before making any financial decisions.
Jessica Irvine is the author of the new book Money with Jess: Your Ultimate Guide to Household Budgeting. You can follow more of Jess’ money adventures on Instagram @moneywithjess and sign up for her weekly email newsletter.
Comments are closed.