Is it time to fix your mortgage rate?
Major banks are changing their fixed mortgage rates at a “startling” pace and, in bad news for new borrowers or those refinancing, one expert say the only way is up.
Recently Westpac announced further increases to its one, two, three, four and five- year fixed rates for owner occupiers and investors, the third time it raised rates in a month, according to comparison website Canstar.
Other banks, including NAB and ANZ, have made similar moves.
Modelling from Canstar show the impact Westpac’s latest changes would have on a $1 million mortgage.
Banks are scrambling to keep up with the rising cost of money, which has escalated since the Reserve Bank of Australia decided to abandon its bond rate guidance at its November board meeting.
“The pace of it is quite startling, I don’t think anyone thought it would be this quick,” Steve Mickenbecker, Canstar’s finance expert, said.
“[The RBA] got rid of the support they had for the bond rate, they said they are no longer going to commit to the 2024 bonds at that 0.1 per cent rate and since then the bond rates have gone back up and the cost of funding has gone up.”
The easiest way to secure future profits was to lock in increases to fixed rate home loans now, Mr Mickenbecker said.
There were now only “a couple” of lenders offering three-year fixed rate products at rates below two per cent, he said, leading to a “strong expectation” that further rate rises were on the cards in 2022.
While three-year fixed rate products were typically the most popular with borrowers, he expected some homeowners to be tempted by the attractive one-year fixed rates still on offer.
He cited the difference between NAB’s current one-year offering, with an interest rate of 1.99 per cent, and three-year offering, at 2.79 per cent, as an example of this.
He cautioned that the “future is uncertain” but said anyone locking in a rate for one year should almost certainly expect to face higher rates when their term ends.
“They’ll be higher, but how much higher is tricky to say,” he said, adding that the “1.99 per cent rate will disappear.
“It’s a call that people do have to make but it’s a tricky call for people to make.”
There is a lot of uncertainty about where rates are headed in 2022.
Even an interest rate rise of under one per cent could add “hundreds” to mortgage repayments each month, depending on the amount of money a buyer borrowed.
Banks had generally left their variable rate products unchanged, or even dropped rates, Mr Mickenbecker said.
Variable rates were aligned to the RBA’s official cash rate, unlike fixed rate products, and this remained at its record low of 0.1 per cent.
While the RBA has repeatedly said it considers an official cash rate rise in 2022 unlikely, once the official rate does rise it, and variable mortgage rates with it, could rise rapidly, Mr Mickenbecker said.
“I think there’s a strong argument to at least consider fixing [your mortgage rate] even though you haven’t picked the bottom of the market,” he said.
“I think people should at least be thinking about it and locking away their payments so they can sleep easy for a little while and know they can afford it today and in at least two or three years time.”
First-home buyer Georgia Di Noia and husband Aaron faced a similar dilemma when securing financing for their recent purchase.
“We did kind of speak about it and someone did recommend to us to go completely variable and to jump on the train when rates do start to go up and get it fixed then,” she said.
“We did think about it and that way we’d constantly have to be watching to refinance and also face the costs of refinancing as well.”
The pair eventually opted to take a split loan with NAB – 90 per cent at a fixed rate for a two-year term and 10 per cent at a variable rate with an offset account.
“We wanted to still have an offset account, which came with the variable account,” she said.
“The offset gave us flexibility… but we tried to fix as much as we could to get that lower rate as well.”
When it came to choosing the term of their fixed-rate loan, they opted for a two-year term because it had a similar rate to the one-year offering from NAB at the time and gave them peace of mind for a longer period.
“There’s so many things out there it’s hard to know what the right thing to do is, it is hard especially because it’s so uncertain with rates at the moment,” she said.
“Nobody really has any idea what’s going to happen. We kind of thought ‘what’s a good option for now’ and we’ll just have to see what happens [in two years].”