Five consecutive months of increases to the cash rate by the Reserve Bank of Australia has brought the question of fixed vs variable interest rates to the forefront of the minds of many of our customers. Exactly how high the cash rate is going to go is another question on everyone’s lips, but ultimately the continuing pace and level of rate rises will be determined by a wide range of national and international events which we cannot wholly predict.
The RBA governor, Dr Philip Lowe, noted in a recent interview that the Reserve Bank Board meets monthly to analyse a huge wealth of data before deciding how fast and how far it needs to go. Analysts warn that more increases are expected, but in most cases it is too late to switch to a fixed rate now.
“We expect interest rates to continue to rise in line with the cash rate, though the rate of increase, which has been 50bps a month, may slow to 25bps soon. The value offered by the currently available range of fixed rate products, most of which are now fixed at well over 5%, means that at this time we continue to recommend variable rate loans to most clients.” Mike Coombes
What is the difference between a fixed and variable interest rate mortgage?
There are two main loan types available for residential and commercial mortgages – variable and fixed. A fixed-rate mortgage is one where the interest rate is set at the start of the loan and it cannot be changed for the period of the fixed rate – usually between one and five years. A variable rate home loan is a loan with an interest rate that is changeable – it could go up or down at any time, depending on market conditions and the policies of your mortgage provider. A common option for many borrowers is to have a split facility i.e. part fixed and part variable.
A lender can adjust the variable rate at their discretion. The lender’s decision to adjust the rates of their variable mortgage products up or down has by convention been guided by the cash rate set monthly by the Reserve Bank of Australia (RBA). The RBA cash rate movements, along with general market forces and the level of competition between lenders, will influence the variable rate movements.
Choosing between a fixed or variable interest rate will depend on your personal financial situation and your chosen strategy for risk management. While a fixed rate mortgage can help to keep the household budget stable, it can significantly hamper your options during the term of the fixed rate. Most lenders restrict the ability to make additional repayments during the fixed rate period, restrict the ability to redraw and limit the options of using an offset account. Breaking a fixed rate loan contract could trigger break costs. These costs may or may not be in the borrowers’ favour, all depending on which way rates have moved.
Variable rate loans are more likely to offer flexible features such as the ability to make extra repayments, a redraw facility and an offset account.
The split facility referred to above provides the borrower with the ability to lock a portion of the debt away on a fixed rate with the corresponding restrictions whilst also having a portion on variable, affording the flexible features of a variable rate loan.
When will interest rates drop again?
The RBA currently looks to be fighting inflation first and foremost with a series of larger-than-average monthly rate rises of 50bp. Analysts expect growth to slow by late 2022 due to the current swift and aggressive RBA tightening cycle, before moderating to a moderate-low pace over 2023. Financial conditions will continue to tighten over 2023, even if the RBA does not continue with rate rises, due to the large fixed rate home loan expiry schedule expected in 2024.
There were a large number of borrowers who took advantage of very low fixed rates during the Covid 19 recovery period. These loans are due to start converting to variable rates in 2024. The impact of existing fixed rate borrowers exiting an average fixed rate mortgage of around 2.25% and onto a rate of 4+% will result in a very big step change in the cost of debt.
Some economists predict interest rates falling by the second half of 2023. Commonwealth Bank’s Head of Australian Economics said in June that they have pencilled in 0.5% of rate cuts in the second half of the 2023 financial year.
How are interest rates impacting the Perth property market?
Fifty-six Perth suburbs recorded median house sale price growth during August, despite CoreLogic’s Perth home value index declining by 0.2 per cent. We expect to see small deviations month to month as buyers adjust to the trend of rising interest rates but Perth’s growing population and a continuing shortage of housing stock point to the current growth cycle continuing overall. Some experts suggest that property prices in Perth will continue to rise by up to 15%, but our real estate contacts on the ground feel that this level of price growth is unlikely.
Real estate agents we’ve spoken with are not unduly concerned – while there was a small decrease in the home value index, Perth property prices are holding up very well overall especially when reflecting on these figures against the national picture. An overall shortage of housing stock for sale and to rent in WA continues to fuel strong competition between buyers and renters, with sellers and landlords achieving strong returns on investment.
About Michael Coombes
Mike Coombes has 40 years of finance industry experience specialising in business acquisition and expansion finance. He also assists clients with commercial property finance and working capital solutions. He is a member of the FAST Hall of Fame for services to the industry.
Southshore Finance is one of Perth’s longest established commercial finance brokers – with a deep knowledge of lenders, their policies and current market conditions. Southshore Finance has the experience and expertise to assist clients’ source and negotiate the very best terms, conditions and rates. Talk to us today about how to secure the best solution for you and your business in the current market.
References
https://reiwa.com.au/about-us/news/56-perth-suburbs-record-price-growth-in-august/
https://www.ratecity.com.au/home-loans/mortgage-news/fixed-vs-variable-interest-rates-choose-2022
https://www.commbankresearch.com.au/apex/researcharticleviewv2?id=a0N4y00000mCUsa
https://www.canstar.com.au/home-loans/what-is-a-variable-rate-home-loan/