Cheap money has helped fuel demand for real estate over the last two years, with homebuyers having access to the lowest mortgage interest rates on record.
That said, while the Reserve Bank may have kept the official cash rate on hold in February, many economists are predicting rates to rise before the end of the year for myriad reasons. According to leading economist Shane Oliver, AMP: “The economy is running stronger than expected, unemployment is likely to push below 4%, and this will drive an acceleration in wages growth to a 3% greater pace in the second half – meeting the conditions for an RBA rate hike later this year. The setback to growth from the Omicron wave is looking modest with new cases already slowing[i].”
Is it time to fix it?
How you structure your mortgage and whether you fix the interest rate on your home loan or leave it as a variable rate depends on your financial goals, job security, personal circumstances and risk profile.
Also, it’s about a year since fixed rates were at their cheapest according to a recent report by the ABC. For instance, 12 months ago, NAB was offering a fixed rate of 2.09% for two years compared to 2.69% now. Meanwhile, variable rates are heading south. ANZ, for example, provides a variable rate of 2.19% compared to 2.72% a year ago, which is a fall of 0.53%[ii].
The impact of the Reserve Bank
As mentioned earlier, many economists are tipping the Reserve Bank to increase rates. However, Australia’s Central Bank remains cautious about tightening monetary policy (raising rates). Also, if the RBA tinkers with monetary policy, it will be gradual, keeping in mind the cash rate’s last increase was a 0.25% hike on 3 November 2010[iii].
Moreover, the gap between variable rates and two-year fixed rates is as much as 0.7%. On this basis, it will take at least three cash rate increases (generally 0.25%) for variable rates to bridge the gap with current fixed rates – and much more if you have a three-year fixed rate. On this basis, sticking with a cheaper variable rate for now might be a sensible option.
Nevertheless, choosing between a fixed rate, variable rate or a blend of variable and fixed, known as a ‘split loan’, is always case by case. For example, if someone borrows 95% of the property’s value, is debt-averse, or is pushing their borrowing capacity to the limit, then a fixed rate could be sensible solution – or at least a split rate with much of the loan fixed.
Then again, suppose the borrower has plans to make significant repayments and has exceptional job security or prospects. In this instance, the borrower might choose a variable rate that allows for extra repayments – or a split loan with a more significant portion of the mortgage balance repaid using a variable interest rate.
The structure of your mortgage generally depends on your circumstances, and a financial specialist from AAP Finance is available to walk you through your options. Call AAP Finance today on 1300 141 453.