To fix or not to fix? The 2022 question
Updated: Jun 13
Like so many Australians, if you have never experienced an interest rate rise, what's to follow will be new for you. You may be considering your options and deciding between moving from a variable to a fixed interest rate to provide more security for what seems to be an unpredictable next couple of years ahead.
The Australian recently reported there are over 500 000 Australians with a Fixed Interest mortgage. It seems that the timing of when many felt incentivised to lock theirs in will see the contract term finishing in mid-2023. That could coincide with continued increases in interest rates with a prediction of more rate rises by the RBA for the remainder of the year.
There's talk of a recession; there's talk of reduced house prices… there are lots of discussions. But it's important to know that what we see in a national headline isn't necessarily what applies to our circumstances. Understanding starts with keeping well informed of your options, even for those getting into a home loan for the first time.
So why are interest rates being increased?
Amongst numerous factors, the RBA has advised that the economy is experiencing higher than average inflation rates (5.1% March quarter) because of increased spending. Despite declaring interest rates would not rise until 2024, the RBA is opting to raise interest rates now to stem the market on this spending. For the most part, those interest rates are being passed on by lenders.
The RBA has advised that a rise in interest rates will likely continue until we see a stabilising economy. Reserve Bank Governor Rob Lowe recently made it clear the May rise will be followed by more increases soon saying, "The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time," he noted in his post-meeting statement. "This will require a further lift in interest rates over the period ahead."
So what does that mean for home loans?
You might feel that a Fixed loan makes the most sense in an unpredictable market, bringing greater security; however, making that change will have some implications, which may include:
Limited/No ability to redraw on additional payments made
Penalties for paying out early
No offset account
If you're on a variable loan, you might consider checking to see that you have the most competitive rate. Once you secure that, you could consider paying more than the minimum or paying fortnightly instead of monthly.
Key features of a variable interest rate, aside from the interest rate itself, may include:
No penalties for paying more
And there's another scenario that you might also consider.
If you move to a variable interest rate of around 2.5%, you might consider scheduling automatic debits at a forecast rate of 4%. Over 12 months with these higher payments, you would build a financial buffer for when variable rates do move. This is just one of several strategies we could talk you through.
So what do I do next?
There are still plenty of great finance deals to be had, just as there are excellent properties to purchase. It's all about timing and preparing in advance. It's also important to note we only recommend solutions we'd be comfortable with ourselves. We pride ourselves on a portfolio of clients with whom we've worked on numerous properties, and that comes from the trust that we'll put forward innovative finance solutions that work for you. Should your circumstances change, we're here to support you through that.
For more, please reach out to our team, and we'll be glad to assist you with a solution that works for your circumstances.