Fixed rates set to rise further in November: Rate City
About half of all four- and five-year fixed rate home loans - and more than a third of three-year fixed rate home loans - have had their rates adjusted upwards in the past two months, according to financial comparison website RateCity.
“The fact that a growing number of institutions are increasing their rates on fixed home loans shows where they think the market might be heading,’’ CEO Alex Parsons says.
He points out that:
Since early September, 188 fixed home loans have had rate hikes – including 88 in the past fortnight - by a maximum of 0.55%.
The trend is for longer fixed rates drifting up.
Competition remains high among one- and two-year fixed home loans, with rates starting from 4.29% fixed for one year.
The news has prompted RateCity to urge borrowers to prepare now for higher rates.
“Movements in fixed rates are common and based on a number of variables, but the trend is definitely to longer term rates drifting up,” Parsons said.
In comparison, shorter term fixed rates remain largely unchanged, or even fell slightly in recent weeks, with one-year fixed rates as low as 4.29%.
“We have seen a lot of competition in the shorter term fixed rates. While they are also subject to the same market forces as longer terms, they’re a lower-risk way for institutions to offer hot rates to attract new customers,” he said.
Fixing can be an attractive option for borrowers because it offers repayment security, making it easier to budget. But they aren’t as flexible, which can be a drawback. Also, some lenders make it harder for borrowers to make extra repayments as a way of building a repayment buffer. And others charge big fees for exiting the loan before the end of the fixed term.
Another key area to watch out for is the interest rate to which fixed loans revert once the set period is over, said Parsons.
“Most fixed rates revert to a variable rate option at the end of the fixed period, which, depending on the rate cycle, could be more than 1% higher,’’ he said. “This can mean having to fork out thousands of dollars more per year to service the same loan.
“Borrowers should prepare for the eventuality of higher interest rates in the future and make sure they can comfortably afford to service the loan if rates increase to the historical average of around 7% or even higher.”
For example, a 0.25% rate rise would increase the first 12 months’ repayments by $540 (or $45 per month) for a borrower with a $300,000 home loan and paying the basic variable rate of 5.19%.
But, if rates were to return to their historical average of 7%, the same borrower would have to find an extra $333 a month, or $3996 a year.
“If borrowers aren’t sure whether they want to fix or not, they do have the option of splitting their loan between fixed and variable – so they have the best of both worlds.”
