In Australia, banks are under pressure to begin raising interest rates for long-term, fixed-rate mortgages. Some have already started to do this, albeit relatively quietly.
The rate hikes will help protect the banks’ profits against the volatility of global financial markets, but they will also restrict buyers’ borrowing power.
We’ll look at what’s likely to happen with rates and how buyers can prepare for inevitable changes.
The prediction is that long-term (e.g. four- or five-year) fixed interest rates will rise while short-term (e.g. two-year) fixed rates will either remain low or continue to fall. The Commonwealth Bank was the first of the big four banks to raise rates on their four-year fixed-rate mortgages by .2% in mid-March 2021. This could trigger a drifting effect of rising rates across the board, particularly during the latter half of 2021. CBA also cut two-year fixed rates at the same time.
The majority of Australians have unsurprisingly opted to lock in their mortgage rates since last year. In fact, the Commonwealth Bank noted that more than half of all new fixed-rate lending were for four-year loans over the pandemic (for context, usually 15% are fixed during a normal year). Between the rock-bottom rates and a fixed-rate mortgage’s advantages for budgeting, the benefits were clear to both new and repeat property buyers alike.
With the clear economic recovery though, these numbers are highly unlikely to last for very much longer. The RBA made some unconventional decisions over this past year, making it possible for banks to receive extremely affordable credit and limit the yields from three-year bonds. The rise of bond yields this year, which is likely to occur, will trigger rising prices of long-term loans while keeping two-year loans at the same levels.
David Plank, ANZ‘s head of economics in Australia, noted that the rise in long-term rates would mean that more buyers would shift from fixed rates to floating rates, likely around 2023 when the rates are expected to tighten. In this case, those property owners would see rising repayment costs, which would limit the RBA’s need to lift its official rates in 2023–2024.
The restriction of low rates will help settle the market and make it more predictable, but it will also limit the opportunities for home buyers. Even if the RBA keeps its rates low, it might not stop the big four banks from raising rates for customers seeking long-term loans. Between predictions for the coming years and yields of bonds, the banks might see this as a way to limit volatility while continuing to allow some new players into the market.
Homebuyers now have a fairly clear-cut warning in terms of how they should plan for the future. Particularly as we approach the second half of the year, it seems nearly guaranteed that the numbers aren’t going to go any lower and are more likely to rise. The below 2% fixed rates on three-year loans will likely disappear, which could affect variable rates as well.
It all adds up to home buyers needing to take stock of their timelines. The longer they wait, the more likely they are to run into higher rates. Locking in a rate now may not prevent rates from rising four years down the road, but it can at least give homeowners the peace of mind they need while they settle into their new property. Predictable payments every month make it possible to map out finances for longer than just the first few months (as you might get with a variable loan).
Shore Financial has a team of property experts who can keep you informed of mortgage news and all its implications for buyers and existing property owners..
It’s impossible to perfectly time the market, as it’s a constantly shifting entity based on everything from government pressure to consumer confidence. But it is possible to manage your assets better with a more focused strategy. As home buyers watch the RBA and its official policies, it’s helpful to know the causes that lead to the effects.
If you have questions about the mortgage process or just want to know if now is the right time to make a move or refinance, we’re here to take the guesswork out of the equation. A mortgage broker not only needs to know how rates are rising and falling, they also need to know the lenders who make the final decisions for customers. Don’t hesitate to get in touch with the Shore Financial mortgage experts. We can help you learn more about how different loans will impact your budget or affect your portfolio, so you feel confident taking the next step.