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Inflation fears prompt rush to fix home loan rates

Australian money and logos for the big four banks
The race is on for Aussies to fix their mortgage rates with concerns growing that they're about to rise. (Source: Getty)

The Reserve Bank of Australia may have decided to keep record-low interest rates on ice - again - but that hasn’t stopped borrowers from racing to lock in fixed home loan rates before they are expected to increase.

The RBA announced on Tuesday it would keep the cash rate at 0.1 per cent, despite property prices booming across the country, creating an affordability crisis.

With ongoing signs the economy is recovering quicker than expected from the COVID-19 pandemic - including prolonged lockdowns in Melbourne and Sydney - there is growing speculation the RBA will lift the official interest rate before the forecast date of 2024.


However, it hasn’t stopped all four major banks - CommBank, Westpac, NAB and ANZ - from raising their fixed-term interest rates while cutting their variable rates. UBank, Bank of Queensland and People's Choice Credit Union have since followed in their footsteps.

The out-of-cycle rate rises from the banks were being driven by increasing borrowing costs.

Evan Lucas, chief market strategist at Investsmart, said there was no doubt mortgage holders were racing to lock in the best deals they could.

“Looking at the number of applications being made, it is elevated above historical norms, there’s no doubt about it,” he said.

“People are wanting longer [loan] terms; most people are buying into two years, as that’s the most competitive at the moment. The banks are trying to push people into the time duration that they expect the RBA to make a change.”

Aerial view of a typical leafy Aussie suburb
Aussie property prices defied the odds during the pandemic which saw other areas of the economy suffer. (Source: Getty) (jandrielombard via Getty Images)

Property boom

Property prices, especially house prices, have continued to skyrocket across the country, up 22 per cent just this year, with increasing demand continuing to drive prices north. Despite warnings the pandemic could cause property prices to plummet, the market only dipped before recovering quickly.

The September-quarter consumer price index was released last week, increasing to 2.1 per cent, its highest level since 2015. Job advertising, as revealed in ANZ’s survey, rose 6.2 per cent, which is in line with pre-Delta-outbreak levels.

Lucas recommended anyone looking to move to a fixed-term home loan to carefully compare fixed and variable rates, as fixed rates may not necessarily deliver the best deal.

“Don’t forget to ask what happens after the fixed rate ends, what will the rate be after that?”

As record-low interest rates helped spur people to borrow more and continue to push property prices up, Lucas said there was concern about whether some borrowers would be able to weather the coming increase in interest.

“It’s been over 10 years since the RBA increased the cash rate,” he said.

“The debt-to-income ratio is nerve-racking, as many people have borrowed six to eight times their income; that pressure to pay back their debt will get ever stronger, especially in places like Melbourne and Sydney. The increase could not just be hundreds of dollars but thousands of dollars.”

The RBA last cut the cash rate in November 2020 in a bid to cushion the impact of COVID-19 amid widespread job losses and people being stood down.

At the time, RBA governor Philip Lowe said interest rates would remain the same until there was a sustainable increase in inflation, but added that wouldn’t happen until wages experienced an equal growth.

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