If you’re an Australian homeowner with a split mortgage rate, it’s likely that you’ve had a pretty frustrating week.
Currently, fixed mortgage rates are rising and variable rates are fluctuating wildly, as competition between lenders reaches frenzied new heights. It’s a situation that can make steady financial planning seem all but impossible, especially for borrowers with mortgages that are split between the different rates.
The big takeaway from this? Fixing your mortgage rates is the only way to get some peace of mind. If you’re a frequent reader, you’ll know that this is something I’ve been saying since April. But with things continuing to heat up, it’s advice that’s only getting more urgent.
Not sure what I mean? Let’s dive a little deeper into what’s going on.
There are a few different factors at play right now, quickly creating what The Australian Financial Review has called an ‘insane’ environment for lenders and borrowers.
The first factor is the runaway housing market. A combination of soaring property prices, record low interest rates and Government-funded support programs have fueled a borrowing frenzy. Most of these borrowers are smart and have locked in their rate – stats show that the percentage of residential property buyers fixing rates have tripled over the last 18 months.
Read More: My property advice? Lock in your rates now. Things are changing.
In turn, this has fueled fierce competition amongst lenders to secure variable loans, and cuts have started flowing thick and fast to keep customers coming in. Over 30 lenders have cut selected variable rates in the last month, including cuts of 40 basis points from NAB and Commonwealth Bank.
At the same time, fixed rates are starting to go up, with Commonwealth Bank also announcing that they’re raising 3 year fixed home loan rates by 40 basis points. I’ll explain why shortly, but it’s created a hell of a situation for those who have split their mortgages between variable and fixed rates. One borrower with a 60/40 split summed it up well when speaking to The AFR:
“One day our broker is telling us the three-year fixed rate is below 2 per cent, the next day it’s above,” said Ms Barraclough. “It is extremely frustrating.”
Don’t be tempted by the cuts to variable rates. They’re just a short-term incentive to get you to sign up.
At this point, some of you might be thinking something like this: “Hang on Justin – you’re telling me that I should fix my rate, even though variable rates are being cut and fixed rates are rising?” Well yes, you should. And here’s why.
As I mentioned before, a lot of Australians have already taken the sensible option and locked in a historically low fixed-term rate. The competition amongst lenders is now in the variable rates, and these variable rate cuts essentially amount to a marketing tactic by lenders to try and draw in more customers.
As their namesake suggests, variable rates are prone to go up suddenly when the national interest rate (often called the cash rate) changes. They’re fluid and hard to budget for. And unfortunately, it looks like a sure bet that cash rates are going to go up soon. Essentially, what may seem like a great deal now could seriously bite you in the ass later.
In comparison, a fixed rate will stay the same throughout its term. With things the way they are, you’ll find it a lot easier to sleep at night knowing your repayments will be consistent and easy to budget for. Plus, fixed rates are currently very low. Sure, some lenders are already creeping their rates upwards – but that’s all the more reason to lock things in now before they get higher.
So why do the experts seem so sure that rates will go up?
Despite widely published news that the Reserve Bank of Australia (RBA) would not raise interest rates until 2024, many experienced economists and financial experts – including myself – have been seeing a very different picture unfolding. Markets seem to agree, trading as if a hike is imminent.
Why? Broadly, the answer is inflation. In the simplest terms, the economy has been flooded with cash to support us through the COVID-19 crisis. This lowers its value and causes inflation, which in turn drives interest rates up in an effort to control it. It’s happening globally, and there’s no reason to think Australia will be spared. Currently, underlying inflation is already 2 whole years ahead of The RBA’s forecast.
Read More: To understand what’s happening in Australia, you need to look off the island.
It’s even led the RBA to change their tune a little, recently hosting a surprise press conference where they admitted that a rate rise could be coming in 2023 instead. I’d argue that this forecast is still too conservative and that it’s going to be much, much sooner. I’m not alone either; even The ABC is reporting that we could expect it as early as next year.
Either way, the recent RBA announcement is seen as the key reason behind the CBA’s fixed-rate hike, and a sign of more hikes to come. For borrowers, the smart move now would be to opt out of this risky, speculative environment and instead lock in their rates.
This is especially true for those on split mortgages – watching your budget forecasts fluctuate wildly as the market adjusts just isn’t worth it, as you may be realising this week. Most importantly, you just don’t want to be caught out when that sudden rate hike finally arrives. It’s something you could end up regretting for a long time.
It’s important to me that our clients have access to up-to-date property advice and analysis of the news as it occurs. It’s why I’ve been putting these updates together, and I hope that they’ve been helpful for you.
Got other concerns about your home loan that you’d like to discuss? Get in touch with one of our talented financial advisors today. They’ll help you cut through the noise and find the best solution.
The information in this article is of a general nature. It does not take your specific needs or circumstances into consideration. You should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions.
