ARE INTEREST RATES ON THE RISE?
Did you know it’s been 11 years since the Reserve Bank of Australia has increased its cash rate? It has been decreasing all this time leaving it with a record low rate of 0.10%, which it first dropped to during November of 2020 in order to help support the economy during the pandemic.
The response of this near zero cash rate has been nothing but positive for borrowers. In conjunction with the low rates, lenders largely decreased their home loans rates, which meant the cost of paying for a mortgage has been at its all-time lowest.
There’s also been talk lately that rates will rise soon (as well as the cash rate), as what comes down must come back up, or will it? There’s definitely thoughts that it will increase fairly soon as the Australian economy has rebounded strongly post the initial pandemic. Some examples are that unemployment rates are the lowest they have been since 2008, the GDP (gross domestic product – which is a broad measure of domestic production or economic health) continues to grow and inflation has spiked, giving an annual inflation rate of 3.5% for 2021.
The Effect Of Inflation
The big question is whether the Reserve Bank Australia (RBA) will raise interest rates soon? (as this pushes the banks to increase theirs). The RBA’s goal is to have inflation ‘sustainably’ between 2-3%. So this leaves us guessing if they will in fact rise given the inflation of 3.5% as above. Although an increase in wages growth generally needs to be at least 3% prior to the Reserve Bank bringing in further inflation, so this is promising. Currently wages growth in Australia is forecast by the RBA to reach 2.75% this year, and 3% over 2023, compared with the current rate of 2.2%
There has been some controversy by some larger lenders (in particular with Westpac) who disagree with the RBAs forecasts on inflation and interest rates. Westpac’s chief economist, Bill Evans, has said that they have pencilled in two rate rises this year: one increase of 0.15% points in August and another shortly after in October of 0.25% points, which would bring the cash rate up to 0.50%.
With evidence of interest rates already rising with many lenders, the question of whether you should be fixing your loan is one to consider.
Variable Or Fixed Loan?
As interest rates seem to be slowly rising, perhaps fixing all or part of your loan could be a good idea. Particularly as once the interest rates rise, you inevitably end up paying higher monthly repayments.
I will go over an example here to clarify this concept further. Imagine you have a $550,000 owner occupied principal and interest loan. You’re paying the loan back over 30 years at a variable interest rate of 2.49%. This means your monthly repayments are $2,170.
But if your interest rate increases to 3.49%, your monthly repayments would rise to $2,467. That’s $297 extra for you to repay a month!
If you were on a fixed rate home loan, your repayments would not change for the period of the fixed loan term you initially made. Eg 1-5 years. You could dodge the rate rise, and hopefully once you’re off your current fixed rate term, you may end up on a favourable variable rate or you may even consider refinancing or fixing again.
We have likely got you thinking of what would be best for you to do. Would it be better to fix your interest rate now in order to protect yourself from potential rate rises in the near future? This all depends on your individual circumstances.
Let’s look at some pros and cons of each loan type.
Pros of a Fixed Interest Rate:
– Stability of set and forget
– Rate rises don’t impact you
– Helps with budgeting
Cons of a Fixed Interest Rate:
– Less flexibility as you are limited in making changes or unlimited extra repayments
– Less features such as redraw facilities
– Reduction of rates won’t impact you
Pros of a Variable Interest Rate:
– Flexibility with extra repayments
– You can get 100% offset benefits
– Easier to refinance or change products
– If interest rates fall, your rate will change
Cons of a Variable Interest Rate:
– You’ll have to pay more if rates rise
– Uncertainty with your cash flow as repayments can change
At Living Home Loans, we can partner with you and take stress out of the decision to work out what would be best for you to do. It may also be of benefit to split your loan having the benefits of each product type. We do the leg work by looking carefully at your financial situation and lifestyle with you, in order to see if fixing your home loan or refinancing are right for you.
Have you got a dream?
Have you got a vision to own property that we can help you with?
Give us a call on 0439 110 255 or contact us today for an appointment.