Fixed Rate Home Loans on the Rise?

Key Summary

• Major banks including CBA and Macquarie have recently increased fixed home loan rates, with CBA raising some terms by up to 0.70 percentage points.
• The number of lenders offering fixed rates below 5% is rapidly decreasing, impacting borrowers seeking repayment certainty.
• Borrowers on fixed and variable rates can review their current loan arrangements and budget for possible rate increases.

Recent weeks have brought a significant development for anyone considering a fixed-rate mortgage. Several major lenders, including Commonwealth Bank (CBA) and Macquarie Bank, have announced substantial increases to their fixed interest rates.

It’s an important shift that has direct implications for borrowers looking for certainty in their mortgage repayments.

What’s Behind the Fixed Rate Increases?

In a notable shift, CBA recently lifted its fixed home loan rates, with its three-year term increasing by as much as 0.70 percentage points. This is a significant adjustment, effectively pricing in the equivalent of multiple Reserve Bank of Australia (RBA) cash rate hikes. Macquarie Bank also followed suit, raising its fixed rates by 0.25 percentage points across all terms.

These lenders are not alone. Across the market, dozens of banks and financial institutions have been quietly increasing their fixed-rate offers. This trend reflects the lenders’ outlook on the future cost of money. Fixed rates are not directly tied to the RBA’s current cash rate; instead, they are based on what banks predict their funding costs will be over the next one to five years.

When lenders increase fixed rates, it often suggests they are anticipating a period of higher interest rates ahead. They are adjusting their pricing now to protect their margins against potential future increases in the official cash rate. For borrowers, this means the window of opportunity for locking in a low fixed rate is narrowing.

The Disappearing Sub-5% Fixed Rate

Just a short time ago, it was common to find fixed-rate options starting with a ‘4’. However, the recent run of rate hikes has changed that. The number of lenders offering fixed rates below 5% has dropped significantly, and this trend is expected to continue.

CBA’s recent changes have pushed its lowest fixed rates above those of its main competitors across all terms. For example, its two-year fixed rate, which was previously offered as a special of 4.99%, is now considerably higher, at 5.79%.

This shift is a clear indicator that the tide is turning for fixed-rate loans. While the majority of Australian borrowers are on variable rates, those who were considering the stability of a fixed term may now find the options less attractive than they were just a few months ago.

Fixed vs. Variable: Reassessing Your Strategy

As with any uncertain interest rate environment, the debate over whether to opt for fixed or a variable rate home loan will be one that you’ll be pondering. Each option has its own set of potential benefits and risks, which can vary depending on your personal circumstances and risk tolerance.

Variable Rate Loans

• Flexibility: Variable rates often come with more features, such as the ability to make unlimited extra repayments and access to offset accounts, which can help reduce the interest you pay.
• Potential for Savings: If the RBA decides to cut the cash rate in the future, your repayments would likely decrease.
• Uncertainty: The major drawback is that your repayments can go up if the RBA increases the cash rate, making it harder to budget.

Fixed Rate Loans

• Certainty: A fixed rate locks in your interest rate for a set period (typically 1-5 years). This means your repayments will not change, providing stability and peace of mind.
• Budgeting: Knowing exactly what your repayments will be makes it easier to manage your household finances.
• Less Flexibility: Fixed-rate loans often have limits on extra repayments and may not offer features like an offset account, depending on the specific loan product. If you break the fixed term early, you might face significant break costs.

With fixed rates on the rise, the security they offer now comes at a higher price. This may lead more borrowers to consider or stick with variable-rate products, despite the uncertainty they carry.

What Steps Can You Consider Now?

Navigating a changing interest rate environment can feel complex, but there are practical steps you can take. Your financial situation is unique, and any decision should be based on your specific needs and objectives.

1. Review Your Current Loan: If you have an existing mortgage, when was the last time you reviewed it? Your circumstances may have changed, and there could be a more suitable product available. Check your interest rate and compare it to what new customers are being offered.
2. Assess Your Budget: Whether you are on a fixed or variable rate, it is wise to understand how a potential rate increase would affect your repayments. Stress-testing your budget can help you prepare for different scenarios and identify areas where you might be able to save.
3. If Your Fixed Rate is Expiring: If you have a fixed-rate loan that is due to expire this year, it’s a good idea to start looking at your options at least a few months in advance. When your fixed term ends, your loan will typically revert to a much higher variable rate. Being proactive allows you to explore refinancing to a more competitive rate.
4. Explore Your Options: The home loan market is incredibly competitive. Don’t assume your current lender is your only option. There are thousands of different loan products available from a wide range of banks and non-bank lenders.

We’re Here to Help You Navigate the Changes

Understanding market movements and how they relate to your personal financial situation can be challenging. You don’t have to figure it all out on your own. Speaking with a qualified expert can provide clarity and confidence.

Our experienced mortgage brokers are here to help. We can assess your current loan, explain how these fixed-rate changes might impact you, and compare thousands of options from a diverse panel of lenders to find a solution that’s tailored to your needs. We’ll get you sorted.

If you’re feeling uncertain about what these rate hikes mean for you, reach out to your local Yellow Brick Road mortgage broker today for a complimentary review of your home loan.