The portion of fixed rate residential lending increased by 50% at the beginning of the RBA easing of the monetary policy when Covid-19 first hit. The RBA originally thought that interest rates would remain low until inflation rose by 2 – 3 %, which isn’t expected until 2024.
However, accordingly to a recent AFR article, many Banks bill futures imply that rates may begin to increase sooner than expected.
In this blog we explore:
- Why are interest rates expected to rise?
- What this means for people with a home loan
- What this means for people entering the property market
- How to best prepare for the future?
Why are interest rates expected to rise?
Interest rates are expected to rise because the economy is starting to recover from the initial impacts of Covid-19. The three-year fixed term funding facility (TFF) introduced by the RBA is due to expire in June 2021. This combined with an increase in low-cost deposits have reduced banks’ cost of funds.
Important note: the RBA interest rates aren’t the only thing that influences the banks’ rates.
What this means for people with a home loan
If you currently have a mortgage with a portion fixed or all fixed you should expect this to increase at the end of the term. The amount it increases by will be dependent on how long is left on your current loan term:
“Banks bill futures also imply a cash rate of 1.1 per cent by June 2024, which would equate to at least four rate increases in 25 basis point increments except for the first, from the current 0.1 per cent,” states Ronald Mizen, AFR Economics Correspondent.
If you have portioned your loan to have some fixed and the other variable, you too will find that the fixed rate will rise at the end of your term. You should also expect your variable rate to increase.
What to do with your existing loan?
The age-old question “should I keep my entire loan variable, fix a portion, or fix all?” will be coming up now more than ever, as rates are predicted to increase over the next few years.
The answer: it is completely up to you and your circumstances. There are pros and cons to all options and it’s best you ask your broker or lender for a home loan review to put your mind at ease.
Talking to your lender will also ensure you are across and fully understand the impact an increase in rates will have on you and your loan repayments.
Benefits of reviewing your home loan
Reviewing your home loan annually comes with many benefits:
- You may be able to shorten the term of your home loan and pay it off faster
- Allows you to choose a home loan that meets your short- and long-term goals
- You may be able to reduce the costs associated with the loan
- There may be an option to save on interest
Put simply, reviewing your home loan on a regular basis ensures it is still the right product for you and your circumstances.
What this means for people entering the property market
If you are looking at buying real estate and require a mortgage to do so, you will find that interest rates on fixed loans are beginning to increase, especially on the longer-term fixed loans.
Jarden Chief Economist Carlos Cacho stated “The time of ultra-low fixed rates is coming to an end, with the last of four and five year fixed rates below 2 per cent gone, and the completion of the fixed term funding facility (TFF) likely to see sub-2 per cent three-year rates disappear in coming months.”
It’s important to note that rates won’t see a huge increase overnight, rather a gradual increase as the economy strengthens. To find out if you’re ready to enter the property market or if it is something you have been thinking about, get in touch with your bank or broker to review your options.
Ledge can help you prepare for the future
At Ledge, our long standing relationships with the banks and the fact we are going through the processes day in day out, enables us to make home loan finance easy for all of our clients.
Additional benefits you receive when coming to Ledge
- In a hot market its most important you can confidently tell a real estate agent that you are a qualified buyer
- We will be able to assist you in becoming that qualified buyer
- We are happy to liaise with the real estate agent throughout the process to give them confidence
- It will separate you from all other interested parties