is it time to settle your mortgage?
At the big four banks, 1-year fixed rates are now hovering around 3%, 2-year fixed rates are around 4%, and 3-, 4-, and 5-year rates are well above 4%, hitting 5% . in some cases.
As a result, Australians are increasingly jumping off the fixed rate bandwagon. In a return to a more normal situation, the proportion of new loans taken out with fixed interest rates – as opposed to variable rates – fell to 28% in February, after having peaked at 47% in July. last year, according to Canstar financial expert Steve Mickenbecker.
“The days of fixing interest rates, at least at the big four banks, seem to be over. NAB’s popular three-year fixed rate is now 2.3 percentage points higher than its lowest floating rate. »
To make fixing at this rate a good idea, one would have to believe that an aggressive campaign of official rate hikes is underway, says Mickenbecker.
“Borrowers who have a strong aversion to increased repayments and who expect a very high Reserve Bank cash rate in about three years, may still see the value of locking in with the fixed rate of five years of NAB, but at 4.99% – 2.8 percentage points above its floating rate – that will be a small minority.
Canstar’s website still has six lenders advertising loans with variable interest rates of less than 2% for borrowers with a loan-to-assessment ratio of 80% or less.
Basically, we are back to the more usual situation where fixed rates are higher than variable rates. Traditionally, this happens because borrowers are willing to pay a premium for certainty of knowing what their repayments will be over a given period.
The risk is that borrowers are now paying too high a premium to repair, compared to what is likely to happen at variable rates.
Of course, no one knows what will happen to variable rates. Most economists predict about four increases in the official exchange rate by Christmas, with the rate rising from 0.1% to around 1% by the end of the year. Depending on who you ask, they expect the spot rate to climb another 1.5-2% next year.
Financial markets are much more fearful, with futures markets betting that the spot rate will hit 3% next year.
Current fixed rate loan offerings appear to reflect these aggressive market expectations for higher rates. However, I would be very surprised if that happened.
The size of mortgages has exploded in recent years, which means that the same percentage change in interest rates hurts households much more in dollar terms.
The Reserve Bank will do what it thinks is right to manage inflationary pressures, but governors know punters and tabloid editors — and some milder-mannered reporters like me, too — will be waiting with brick bats. if they go too hard, just as fast.
Locking in your mortgage interest rate is always a gamble. You might be right and get a good deal – or you might end up paying more. Only time will tell.
If payment certainty is important to you, investigate. However, fixed rate loans also come with a host of disadvantages, including the inability to have a mortgage offset account, a limited ability to make additional payments within the set time frame, and potential breakage costs, if you wish. switch to another lender.
Before rushing to secure new, higher fixed rates, consider shopping around for cheaper fixed and variable rates.
- The advice given in this article is of a general nature and is not intended to influence readers’ decisions regarding investments or financial products. They should always seek professional advice that takes their personal circumstances into account before making 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’ financial adventures on Instagram @moneywithjess and sign up to receive their weekly email newsletter.