Article by Patrick Lynch, Head of Operations
At its meeting on Tuesday 1 September, the Reserve Bank of Australia (RBA) held the cash rate at 0.25%, consistent with expectation. What isn’t consistent are the thoughts of the market around what Lenders will do next on interest rates, as the RBA rate is only one of several factors involved in pricing loans. There are the 2 competing theories:
Theory 1 – mortgage rates will remain competitive
There has been significant recent competition for business across all Lenders, including lowest ever interest rates and refinance rebates. Customers are seeking out the best deals, particularly refinances and often through the use of brokers, and Banks cannot afford to lose borrowers. Many commenters continue to see aggressive rate discounting, with the Spring Property Market a potential encouragement to property transactions where COVID allows.
Theory 2 – lower Bank profits driving up rates
Recent financial results and other announcements by the Big Banks indicate that profitability has been (and will be) negatively affected by COVID19, loan deferrals, low credit and economic growth, etc. In order to recoup, some are expecting them to increase variable mortgage rates in early 2021, despite the RBA being clear that the cash rate will stay low for some time. It isn’t too long ago that Banks increased variable rates, claiming funding costs were higher, despite the RBA rate being static.
What are your options?
This is very tricky – individual circumstances will determine what is best for each borrower.
If you think rates are going to increase, perhaps you should now consider taking advantage of the very attractive fixed rates on offer. The main advantage of a fixed rate is certainty – you know for a period of time (generally 1 to 5 years) your rate, protecting against rate increases, and principal and interest repayments are consistent. This enables you to plan for the future, set financial goals, budget, etc. When the fixed rate ends/ expiries, the loan reverts to variable (and you can choose all over again).
However, a fixed rate loan is not as flexible as a variable rate loan. If you think your financial situation is likely to change during a potential fixed rate period (such that you may need to repay early), variable might be best. Most fixed rate loans have limited features e.g. no offset, an inability to make additional (or only limited) repayments, no access redraw, etc. If rates fall during the fixed rate period, you miss out. Should you need to break the fixed rate before expiry, an early repayment premium could be payable and can be significant, depending on the amount of the loan, rate differences and fixed term remaining.
Variable rate loans provide flexibility. Yes, the interest rate can rise or fall throughout the term of the loan – and currently variable rate is more expensive. The benefits are in the features – unlimited additional repayments and redraw, offset accounts, gains from falling interest rates, etc. However, you aren’t protected against interest rate rises and it can be harder to budget.
One final option is to split your loan – nominating part fixed and part variable, combining the benefits of both and hedging against the costs.
Closing
We cannot tell you what to do, but we’re happy to answer any queries and to help you process any changes. Reach out for more information – we’re here to help!
Long Property blog content provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances and your full financial situation will need to be reviewed prior to acceptance of any offer or product. Nothing on the Long Property website constitutes legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.
