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‘No longer good enough’: Is now the time to fix?

Lucy Dean
·4-min read
Hand holding a house key and piggy bank in front of a large house. The key ring has a house shaped icon on the end and is shiny silver colour. You can see the front door in the background. The key ring house icon is dangling down. Close up with shallow focus and copy space. Savings and New house concept.
(Image: Getty).

Australia’s lenders are beginning to increase their four-year fixed rates, however that doesn’t mean borrowers need to panic, experts have said.

Instead, they should simply spend some time considering their options, given the continued ultra-low interest rates, Canstar group executive Steve Mickenbecker said.

Canstar has found eight lenders increased their longer term fixed rates in April so far.

“We don’t believe that borrowers need to panic, but with the Reserve Bank’s low rate term funding for lenders coming to an end around mid-year, there may be some adjustment to three year fixed rates at that time,” Mickenbecker said.

“There are 167 fixed rates below 2 per cent, providing ample choice to refinance from the average variable rate of 3.26 per cent. Average is no longer good enough when the savings are so huge.”

He said borrowers should think about switching to a lower rate sooner rather than later to capitalise on the savings.

According to Canstar analysis, moving from the average variable rate of 3.26 percent to the lowest 1-year fixed rate would see a home owner paying principal and interest on a $500,000 loan save around $412 a month.

Over the course of the year, that would total $7,901.

“The sooner borrowers switch into a low rate loan the better. Now is the best opportunity we have ever seen to start the clock on monthly savings and the opportunity to get ahead that comes with a low rate,” Mickenbecker said.

Caution urged for bumpy road ahead

However, he said it’s also important that borrowers do also begin to prepare for higher interest rates.

“[An] aspect to consider when looking at a fixed rate is the revert rate, the interest rate your loan moves to after the fixed term. Revert rates are typically higher which could mean having to renegotiate your loan at the end of the fixed term to retain a competitive loan.”

For example, a borrower on the average four-year fixed rate of 2.42 per cent would make a monthly repayment of $1,955 over the fixed term, provided their loan was worth $500,000.

Once the fixed period expires, the average revert rate is 3.63 per cent. That means repayments will increase to $2,064.

“Borrowers who fix their rate need to stay watchful as the maturity of their fixed term approaches, as the rate the loan will revert to is likely to be higher than the fixed rate. They will need to renegotiate or refix their loan to avoid paying too much,” Mickenbecker said.

That doesn’t mean borrowers should be put off fixing, provided it’s the right option for them, he added.

 
Source: www.canstar.com.au - 26/04/2021. Based on owner occupier fixed loans available for a loan amount of $400,000, any LVR and principal & interest repayments. Top products selected and table sorted in ascending order by rate followed by comparison rate for each fixed term. Within each fixed term, one product per provider is listed. Comparison rates calculated based on a $150,000 loan amount over a total loan term of 25 years.
Source: www.canstar.com.au - 26/04/2021. Based on owner occupier fixed loans available for a loan amount of $400,000, any LVR and principal & interest repayments. Top products selected and table sorted in ascending order by rate followed by comparison rate for each fixed term. Within each fixed term, one product per provider is listed. Comparison rates calculated based on a $150,000 loan amount over a total loan term of 25 years.

“Mortgage holders are spoilt for choice, with low rates available across the range. Whatever they do now, they should be making sure that the rate they are taking is somewhere around 2 per cent,” he said.

“There are multiple strategies available to borrowers, including to fix for five years now in expectation that rates will rise, fix for a shorter term with the expectation that they will get another bite of the cherry before rates have gone up, or maintain a variable rate and fix when rates start to move up.

“All of these strategies work with rates as low as they are, provided borrowers get into the low rates on offer now.”

The Reserve Bank of Australia will meet on Tuesday 4 May to decide the official interest rate for May.

Mickenbecker said it's highly unlikely the central bank will decide to increase rates for at least three years, despite the surprising rate at which the property market is growing in value. 

“Borrowers shouldn’t waste energy second guessing the Reserve Bank, but put their energies into getting a low rate now.”

Image: Yahoo Finance
Image: Yahoo Finance