Don’t Panic: Why Not Hurry Up To Set A Home Loan Interest Rate?
Homeowners looking for low interest rates should check their credit carefully as banks raise the fixed rate on some mortgages.
Interest rate hikes are expected to gain momentum as the world enters a period of higher inflation, but credit professionals say people shouldn’t panic.
Some short-term fixed rates are still falling, they say, but for longer-term rates the only way up is.
Four-year and five-year fixed rates below 2 percent have all but gone, compared to 26 different lenders who offered them in January, RateCity data shows.
A spike in inflation in the US this month scared global financial markets, and some economists believe interest rates could rise faster than previously expected.
RateCity’s research director Sally Tindall said the Australian Reserve Bank did not expect official interest rates to rise until 2024, “but that is only two and a half years away.”
“When it comes to fixed rates for four and five years, it’s no surprise that banks take that into account,” she said.
The banks also had a short-term funding facility from the Reserve Bank that offered them 0.1 percent money. However, this should end on June 30, Ms. Tindall said.
“That takes one source of funding off the table and I think banks will raise interest rates after that,” she said.
“But don’t panic and don’t rush to fix it because you’ve heard they are increasing.
“There are still some extremely low interest rates. Some banks may keep some of their interest rates low for as long as they can in order to attract new customers.”
Commonwealth Bank increased its fixed rate for three years this month, with more expected to follow.
Ms. Tindall said the correct timeframe for setting it will depend on the circumstances of each borrower and whether they plan to sell, upgrade, or switch mortgages over the next several years.
“Think about what your plans are about that fixed income term.”
Fixed rates are growing in popularity, but floating rate loans lack the flexibility. They may charge break fees for early exit from the loan and may not offer benefits such as contra accounts or new subscription options.
Steve Mickenbecker, Canstar Group’s executive financial services, said longer-term firm deals are on the rise, but “people don’t need to panic right now.”
“Fixed rates are still lower than floating rates,” he said.
“There is no question that prices will rise again. It is inconceivable that they can stay where they are now.”
Mr Mickenbecker said most borrowers would have preferred to fix two or three years, and those looking for longer terms should check if their bank allows some flexibility for additional repayments.
Borrowers can be hit hard by break fees on fixed rate loans. However, this usually happens when the interest rates are much higher. That’s because switching from a higher rate fixed rate loan to a lower rate loan costs the bank money, but stopping a low rate fixed rate loan is nowhere near as costly.
“At the moment there is no great risk for five years,” said Mickenbecker.
“Don’t worry if you’re trying to find the bottom. You just want to set an interest rate that you can afford.”
Originally posted as Don’t Panic: Why Not Hurry Up To Set A Home Loan Interest Rate?