Home loan clients who are considering a fixed rate mortgage are advised to make the switch as soon as possible, as banks are already raising rates in response to the RBA’s moves.
As expected, the Reserve Bank kept the official cash rate at 0.1% at its monthly board meeting in June, which means variable home loan clients can rest for the time being.
But the central bank closed a term finance facility that was lending money to banks, building societies and credit unions at just 0.1% interest, meaning fixed rates are in. rise.
The closure of the term financing facility has increased long-term financing costs for lenders, and they have already started to pass these costs on to borrowers through increases in fixed rate mortgages.
Beware of rising fixed rates
Analysis from consumer comparison site RateCity.com.au shows that over the past month, 19 lenders, including Westpac and NAB, increased at least one three-year fixed rate, while 17 lenders increased at least a fixed rate over two years.
To be clear, many lenders have cut rates on these products as well – and borrowers can still find 38 three-year fixed rate mortgages and 189 total home loans with less than 2% interest.
But the larger trend suggests that fixed rate mortgages are more likely to rise than fall over the coming months.
âThe four- and five-year fixed rates have already bottomed out, provided there isn’t another national emergency that requires the RBA to cut the cash rate below zero,â said Sally Tindall, Research Director of RateCity. The new daily.
âAt the start of the year, there were 32 four-year fixed rates below 2%. Now there are no more.
And so, if you wanted to repair all or part of your home loan, it makes sense to do so as soon as possible – although it should be noted that fixed rate mortgages are not for everyone.
They often don’t give access to clearing accounts, charge a high break fee for an early exit, and usually have caps on additional repayments that can extend the life of your loan.
The landscape also changes significantly when these loans come due.
According to RateCity, the average mortgage holder who takes out a fixed-rate mortgage of $ 500,000 over two years from a Big Four bank will pay interest of 1.94% during that period.
But when they get to the end of their term, they’ll go to what’s called a âreturn rateâ.
RateCity Analysis shows that the average rate of return among the Big Four banks is 3.43%, which means that the monthly repayments for someone with a $ 500,000 mortgage would increase by $ 368 at the end of their two-year term .
Of course, this doesn’t mean that you should stick with a variable loan, but rather that you should take these additional factors into account when weighing the pros and cons of repairing your loan.
But that peace of mind comes at the cost of greater flexibility and limits the amount you can earn in additional repayments.
As for borrowers sticking to a variable rate, the Reserve Bank said on Tuesday that “its central scenario for the economy” suggests the bank won’t hike interest rates until 2024.
But while this does mean that your mortgage rate will likely stay low for the foreseeable future, interest rates will inevitably rise at some point, so it’s best to be prepared.
With this in mind, RateCity has offered the following tips to people who are about to take out a loan.
Three tips to prepare for future rate hikes
- “Don’t bite more than you can chew: Banks test your loan but make sure you do the same. Check that you are comfortable paying the mortgage if the rates go up by at least 2.5%, [and by] even more if you are on a package
- “Make additional refunds: Every additional dollar you put into your loan now equals one dollar less you will have to pay in interest when rates rise. If you have a fixed rate and are over the limit on additional repayments, consider putting the money aside in a savings account to be ready for the end of your fixed term.
- “Set a reminder to refinance: If you have a fixed rate loan, write down the end date and look for a better deal at the end. If you have a variable rate, check your mortgage at least once a year.