Should I fix my interest rates?

Should I fix my interest rates?

With the recent rise in the official cash rate by the RBA, many people are now concerned about what they should be doing with their current mortgages. Everyone is asking us the question -  ‘should I fix my interest rates?’ 

We recommend making informed decisions rather than jumping in when hysteria stirs your attention. Fixing your interest rates now may seem like the safer option to take, but it may see you losing out over the next 2-3 years. 

Looking over a 3 year period, the variable rate is currently around 2.2 - 2.5 % depending on which bank your mortgage is funded through. The fixed rate for the 3-year term is between 4.3% - 4.5%. This is a 2% difference that needs consideration.

For the variable rate to increase to match that fixed rate, there would need to be 8 rate hikes in that period. Depending on which economist you listen to, there will be around 6 to 8 rate hikes by 2023. 

On the basis that there are 8 rate hikes, you would be no better off for having locked in your rates. You would only be better off if there are going to be more than 8 rate hikes. You would have to be of the opinion that the RBA will hike rates more than 8 times in the coming 2-3 years to be better off.

We are having these conversations with all of our customers at the moment and helping them model out their cashflows over the coming years. Please email [email protected] to make an obligation-free appointment to discuss your circumstances.

May Interest Rates Update

The Reserve Bank of Australia (RBA) has lifted the official cash rate for the first time since November 2010. 

At its meeting on 3 May, the RBA board decided to increase the rate by 25 basis points from a record low of 0.1% to 0.35% and flagged further tightening to come.

The board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy through the pandemic.

RBA Governor Philip Lowe said the resilience of the Australian economy was particularly evident in the labour market, with the unemployment rate declining over recent months to 4%.

Lowe also said inflation had picked up significantly and by more than expected, although it remained lower than in most other advanced economies.

Both headline and core inflation are seen to remain above the 2-3% target this year and next before easing to 2.9% at the end of the forecast period in June 2024 according to  the RBA said in its Statement on Monetary Policy. The cash rate is assumed to be 1.75% at year’s end and 2.5% at the end of next year.

RBA highlighted that China’s lockdowns to combat the coronavirus will add to existing pressures on global supply chains, while Russia’s war on Ukraine have caused higher energy costs and commodity prices.

However, the resulting higher commodity prices driven by the conflict will boost national income in Australia and probably see the terms of trade reach a new peak in the first half of this year.

As expected, all lenders have passed on the full 25 basis points on to their customers who are on a variable rate.

ANZ and NAB customers will be the first to experience higher variable rates with rate hikes that came into effect on 13 May. This will be followed by Westpac customers on 17 May and CBA customers on 20 May 2022.

While the big four banks have announced the 25 basis point hike on variable rates, they are still offering higher discounts to borrowers who can put down a deposit of 30 percent or more as the banks compete for lower-risk borrowers.

Current Interest Rates (Big 4)

*NAB & ANZ variable rate increased on 13 May 2022

*Westpac variable rate will increase on 17 May 2022

*CBA variable rate will increase on 20 May 2022

*NAB & ANZ variable rate increased on 13 May 2022

*Westpac variable rate will increase on 17 May 2022

*CBA variable rate will increase on 20 May 2022

What it means for homeowners

As this is the first time the RBA has lifted interest rates in almost 12 years, an estimated 1.1 million Aussie homeowners will have had to deal with a rate rise for the very first time.

Mortgage holders will need to brace for the rate hikes to be passed on to them. Those on a variable rate will see their repayments go up by next month. 

Those who were lucky enough to lock themselves into a low fixed rate will not need to worry about a hike but may see the rates double when their fixed-interest period ends.

And with more rate rises on the horizon, this could jump to $558 a month if there is a 2-percentage-point rise, by mid or end next year for a $500,000 loan over 30 years currently at 2.5%.

This would put a significant strain on people’s household finances – but there are some options to keep repayments as low as possible.

Give Darren a call on 0452 339 778 or email him at [email protected] to discuss what options you have available.

Note: The material and contents provided in this publication are informative in nature only.  It is not intended to be advice and you should not act specifically on the basis of this information alone.  If expert assistance is required, professional advice should be obtained.