With interest rates rising, is it time to renovate your home loan?
Last year Australian homebuyers saw some of the lowest and most competitive fixed-rate mortgage rates ever, but this is slowly changing.
This year, fixed home loan interest rates have generally risen again, with large banks rising first and a number of smaller banks and institutions followed by contributions in kind.
Two moves appear to have triggered the recent hikes – the APRA’s increase in the serviceability buffer and the lowering of the Reserve Bank’s 2024 forecast for a cash rate hike, which is further explained here.
The rate hikes on home loans were primarily based on fixed rates, with floating rates either reduced or unchanged.
As a result, the pendulum could swing back to variable-interest home loans – fixed loans now also account for a smaller market share than just a few months ago, with market share falling by 1.5 percentage points from July to September.
Felicity Emmett, senior economist at ANZ, said interest rates could rise significantly in the coming months.
“Fixed mortgage rates have been rising for a few months and are expected to continue to rise. Market rates for two and three years have risen sharply as the markets take more than expected economic and inflationary data into account … suggesting that fixed mortgage rates are likely to rise quite quickly in the coming months, “said Ms. Emmett.
“In the two years ended June 2021, the average discounted floating mortgage rate decreased 90 basis points [0.90%], while the three-year fixed rate fell 170 basis points (1.70%). This created an unprecedented gap between fixed and floating rates, which peaked at 150 basis points (1.50%) in March this year.
“A rise in fixed-rate mortgage rates is more important in this cycle. Fixed-rate mortgage rates are well below floating rates during the pandemic, which has led to a significant postponement of their availment. Almost half of new borrowers are now choosing fixed-rate mortgages, compared with around 15% before the pandemic.
“It’s true that floating rates have been going down in the last few weeks, but the lowest mortgage rate available to new borrowers will rise by about 50 basis points in the coming months.”
RentBetter chairman Tony Breuer said the interest rate cycle has turned and painted the picture for real estate investors.
“For those investors who do not yet have fixed interest rates, this primarily means a large reduction in free cash flow,” said Breuer.
“With interest rates this low, even a small increase in interest rates is a very large percentage contribution – for example, an increase of 0.5% from a base of 2.0% means an increase in interest costs of 25%.
“This will put pressure on many landlords’ cash flow resources and focus their attention on maximizing rental flows and reducing costs such as insurance, repairs and brokerage fees.”
Fixed mortgage rates will rise sharply: ANZ
So is it time to fix it?
Lending director at non-bank lender WLTH Catherine Mapusua said that even as interest rates rise, borrowers need to make sure that a fixed rate loan is suitable for them.
“[Lenders] may limit additional repayments and may charge break fees if your circumstances change, “Ms. Mapusua said.
“If you have to switch banks, sell the property, or break the rate of your repayments, you risk fees that can range from a few hundred to several thousand.
“For people on an adjustable mortgage, you may want to set a portion of your interest rate sooner rather than later to make sure you can keep making payments.
“If you have a fixed rate, consider paying a blocking fee. This can help secure your offered fixed rate at settlement time and protect you from interest rate hikes before the loan is paid off.
“Given the rate at which rates are rising and the challenge of predicting it, speak to your provider to put you through a ‘stress test’ to see what your future financial condition is.”
What could rising interest rates mean for house prices?
With APRA’s serviceability buffer expected to reduce borrowing capacity by 5% – and in some cases even more – and interest rates trickle up, Breuer said there could be a drop in home prices.
“Historically, there has been an inverse relationship between interest rates and property prices. There’s not much you can do about it other than sell the property when you are convinced you will,” he said.
“But the most important thing is that the investment works in terms of cash flow.”
CoreLogic data released last week shows that house prices rose another 1.5% in October, up 21.58% nationwide in the past 12 months.
Ms. Emmett also said rising interest rates might be more of a handbrake than APRA, which is tightening lending standards.
“Lower borrowing capacity and a slower pace of house price increases are likely to result in lower loan growth,” she said.
“This is not an undesirable outcome given regulators’ concerns about the rising risk of highly indebted households. A slowdown in credit growth could take further macroprudential tightening measures off the table, even if it’s a little early to be sure.”
Would you like to buy your own home or refinance? The table below shows home loans with some of the lowest interest rates in the owner-occupier market.
|Tariff type||Offset||Draw again||Ongoing fee||Upfront fees||LVR||Repayment of the lump sum||Additional repayments||Pre-approval|
|SELECTEDLIMITED TIME OFFER|
Smart Booster Home Loan With Variable Discount – 2 Years (LVR.)
|SELECTED100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES|
Low Interest Home Loans – Prime (Principle and Interest) (Owner Occupied) (LVR
|SELECTEDREFINANCING IN MINUTES, NOT WEEKS|
Nano Home Equity Loans Variable Owner Occupied, Principal and Interest (Refinance Only)
|SELECTEDNO UPDATE OR ONGOING CHARGES|
Owner Occupier Accelerates – Celebrate (LVR.)
- Fast processing times, can take 30 days to complete
- For purchase and refinancing, at least 20% down payment
- No ongoing or monthly fees, add 0.10% offset
Photo by Waldemar Brandt on Unsplash
When selecting the above products, the entire market was not considered. Rather, a stripped-down portion of the market was considered, including retail products from at least the four major banks, the ten largest customer-owned institutions, and Australia’s larger non-banks:
Some vendors’ products may not be available in all states. In order to be considered, the product and the price must be clearly published on the product provider’s website.
In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To learn how Savings.com.au handles potential conflicts of interest and how we are paid, please click through the website links.
*Comparison rate is based on a $ 150,000 loan over 25 years. Please note that the comparison price only applies to the examples given. Different loan amounts and terms lead to different comparison rates. Costs such as redemption fees and cost savings such as fee exemptions are not included in the comparison price, but may affect the cost of the loan.