It’s only a matter of time before the Reserve Bank of Australia increases the cash rate – and that time appears to be drawing ever-closer.
For much of 2021, the Reserve Bank has said it will increase the cash rate from its current setting of 0.10% only when “actual inflation” is “sustainably” within a target range of 2-3% – and that this would be unlikely to occur “until 2024 at the earliest”.
However, at a board meeting in November, the Reserve Bank said it now expected the inflation target to be met in “late 2023”.
Economists from the big four banks, though, think the Reserve Bank will move even earlier. Their forecasts are:
The main reason some economists think the Reserve Bank will lift the cash rate ahead of its forecasts is because inflation appears to be increasing more quickly than expected.
In the March quarter of this year, ‘headline’ inflation was 1.1% and ‘actual inflation’ (which excludes some volatile items from price tracking) was also 1.1%. Both those numbers have since increased:
As a result, some economists believe Australia’s actual inflation rate will sustainably reach the target range of 2-3% ahead of schedule – and, therefore, that the Reserve Bank will increase the cash rate ahead of schedule.
Mortgage lenders often take their lead from the Reserve Bank’s cash rate decisions. So when the Reserve Bank starts increasing the cash rate, home loan interest rates are also likely to rise.
However, lenders are independent and free to make their own decisions. That’s why, over the past few weeks, several dozen lenders have increased their fixed rates (with a few lenders also increasing their variable rates).
It’s possible fixed rates will continue drifting upwards over the next few months.
With all these factors in the mix, you might be wondering: if you buy a property, should you get a fixed-rate loan? And if you already have a loan with a variable interest rate, should you refinance to a fixed rate?
That depends on the answer to four big questions.
First, what’s likely to happen to interest rates over the next three to five years?
As mentioned earlier, the Reserve Bank and the big four banks expect the cash rate to increase during that period. That, in turn, would almost certainly trigger an increase in mortgage rates – in which case, fixing now might be a good idea. However, nobody has a crystal ball, so it’s theoretically possible interest rates might fall instead – in which case, going variable might be a better option.
Second, what’s likely to happen to your personal circumstances over the next three to five years?
You might be confident your job will be secure and your income will keep rising – in which case, you might be willing to accept the risk of having a variable rate. Conversely, you might be worried about your job security or expect your income to fall – in which case, you might want the certainty of locking in your interest rate.
Third, if you did fix, would you be able to refinance at the end of the fixed-rate term?
When a fixed-rate term ends, borrowers are typically moved to a variable loan. Sometimes, this ‘revert’ rate is significantly higher than the fixed rate. That’s not a problem if you’re able to refinance to a more competitive loan – in which case, fixing now might make sense. However, if your circumstances were to prevent you from qualifying for a new loan (e.g. if you didn’t have a job or had recently started a business), you’d be forced to stay with your current lender – in which case, you might be better finding a competitive variable loan now, while you still have the chance.
(Please note Shore Financial brokers can often secure ‘pricing’, or a discount off the revert rate, if a customer can’t refinance, which is another reason why it’s good to be represented by a Shore broker.)
Four, do you expect to sell your property during the fixed-rate term?
If you did sell during that period, and therefore repaid the loan early, you’d probably be charged a break fee – in which case, fixing might not be a good idea.
As you can see, deciding whether to go fixed or variable is a difficult decision, with each option having pros and cons.
So it’s important you make a decision based on your personal circumstances. It doesn’t matter what choice a friend or colleague has made, because their circumstances would probably be different to yours.
At Shore Financial, we’ve helped many borrowers wrestle with this difficult decision over the years. We can help you too. We’ll talk you through the pros and cons and model different scenarios for you, so you can make an informed decision.
To discuss your options, you can call us on 1300 416 700, email us on email@example.com or fill in this online form.