Is it too late to fix your mortgage rate?

The Reserve Bank of Australia has raised the cash rate for the first time in over a decade, so with interest rates already rising, is it too late to lock in your mortgage rate?

There are over a million Australian homeowners who have never experienced an interest rate hike until now. In the 11.5 years since the last Reserve Bank of Australia (RBA) cash rate hike, it had fallen to a record low of 0.10% after years of cuts, only to be raised in May at 0.35%.

It is fair to assume that this first rate hike in May 2022 will not be the last. In fact, three of the big four banks now forecast that the cash rate could climb above 2% by 2023-24.

The latest cash rate forecasts from the big four banks:

  • ABC: 1.60% by February 2023
  • Westpac: 2.25% by May 2023
  • NAB: 2.60% by August 2024
  • ANZ: 2.25% by May 2023

For a whole generation of homeowners who have never experienced a rise in interest rates, you may be wondering if you missed the boat to lock in the interest rate on your home loan.

To fix or not to fix after the rate hike

A popular option homeowners turn to to avoid the volatility of changing interest rates is to lock in an interest rate for a set period. Fixed rate home loans offer homeowners the stability of knowing that your interest rates will not change throughout the fixed term, usually 1 to 5 years.

If you’ve been paying off your home loan for several years, you may be in a sound financial position to consider refinancing. If this is the case, you might consider switching from your variable rate home loan to a fixed rate option.

However, homeowners should keep in mind that fixed interest rates have been rising for quite some time. Westpac last month raised its fixed rates six times in 2022, and NAB and ANZ raised their fixed rates for the fourth time since the start of the year. CommBank also raised interest rates for the fourth time since 2022 last month, raising fixed rates by up to 90 basis points in some cases.

So, would you be better off fixing interest rates today to protect your budget from expected rate hikes? RateCity crunched the numbers to find out what the impact of this scenario would look like on a 25-year, $500,000 home loan.

Assuming the NAB’s prediction of multiple rate hikes taking the cash rate to 2.60% by August 2024 comes to pass, a homeowner paying the average homeowner variable rate of 2.89% could see their rate drop. increase to 5.39%.

If the same owner switched today to the current lowest two-year fixed rate of 2.45%, he could hypothetically save $13,694 in interest payments right now by fixing today.

Or, if the owner refinances today at the current two-year average fixed interest rate of the big four banks of 3.87%, he can save only $3,079 on interest payments by fixing today.

Impact of the move to a fixed rate today

Interest rate Interest paid in the next 2 years Interest savings moving from the current average floating rate
Current average variable customer

2.89% dropping to 5.39%

$42,198
Lowest variable rate

1.79% dropping to 4.29%

$32,899 $9,298
Lowest 2-year fixed rate

2.45%

$28,503 $13,694
Average 2-year fixed rate of the big four banks

3.87%

$39,119 $3,079

Note: Average rates based on RBA figures. Rate hike based on NAB forecast of 2.60% cash rate by August 2024. Fee and rate hike factors. Source: RBA.gov.au RateCity.com.au, data accurate as of 5/16/22.

What this assumption may indicate for some homeowners is that prioritizing a competitive interest rate can help them save interest in the long run. Even moving from the current average variable interest rate to the lowest variable interest rate can save you $9,298 in interest costs when taking into account hypothetical rate increases.

Homeowners may want to keep in mind that regardless of whether they choose to fix or not, once that fixed period is over, their rate may revert to the lender’s current standard variable rate. This is usually higher than the fixed rate you’ve locked in in previous years, especially in an environment where rate hikes are expected.

Is it too late to set a mortgage rate?

So, is it too late to switch to a fixed rate mortgage? No, but the interest you might save will depend on your financial situation and your home loan goals.

Although fixed rates have been on the rise for many months, you may still be able to get a lower rate home loan today to avoid some of the impacts of rate increases over the next few years, according to the calculations below. above. But the total interest you might save will depend on your current interest rate, the lender you choose, and the new interest rate you are offered.

If your financial situation has improved over the past few years and your credit score or income has increased, or if you have accumulated more equity in the property, you may be in a competitive position to refinance. Lenders generally favor refinancers who have excellent credit scores as well as loan-to-value ratios of 80% or less, so you may be more likely to get approved for a home loan with a lower rate. Nowadays.

Reducing the interest charged on your home loan, whether you opt for a fixed rate or variable rate home loan, can help limit your mortgage repayments over the next few years.

Homeowners may want to keep in mind that there is more to a home loan than just the interest rate offered, even in a rising rate environment. Variable home loans are generally more likely to offer features, such as an offsetting account or a withdrawal facility, which are two alternative options that help homeowners lower their mortgage repayments.

Be sure to compare all features and fees associated with a home loan before signing on the dotted line.

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