With the Reserve Bank of Australia having raised interest rates for the first time in a decade, many homeowners have begun to consider locking-in their home loan rate. But is it too late to act?
With over one million Australian households, many of which have never seen a rise in interest rates until now, the Reserve Bank of Australia (RBA) made an unexpected decision to hike their cash rate from 0.10% – after 11.5 years and countless cuts- up to 0.35% in May this year; leaving numerous homeowners feeling unprepared for such drastic changes to their finances suddenly occurring.
It’s probable that the first increase in May 2022 won’t be the last. In truth, three out of four major banks predict a cash rate above 2% by 2023-2024.
What does this mean for homeowners?
Homeowners frequently turn to fixed-rate home loans for a reliable way of avoiding the unsteadiness of varying interest rates. With this option, you can lock in an interest rate for up to five years so that your payments are secure and predictable throughout this period. Unlike variable interests which may fluctuate during the loan term, fixed rates provide stability knowing that your payment will not increase unexpectedly over time.
Should you refinance to a fixed interest rate?
If you’ve been steadily paying off your mortgage loan, then it may be worthwhile to consider refinancing. You can switch from a variable rate home loan to an unbeatable fixed-rate option that offers stability and peace of mind. Refinancing could help you save money in the long run or put more cash back into your pocket every month.
Yet, it is important to note that fixed interest rates have steadily been rising as of late. Just last month Westpac raised its fixed rate six times in a period of 2022, NAB and ANZ hiked their own respective programs four times since the beginning of this year, while Commbank also elevated their interest rate by up to 90 basis points after increasing it fourfold during 2022.
If NAB’s prediction of multiple rate hikes to 2.60% by August 2024 comes true, the average variable owner-occupier mortgage interest rate could potentially increase from the current 2.89% to 5.39%.
What to prioritze next.
Homeowners should consider prioritizing an attractive interest rate to maximize their savings in the long run. Even switching from today’s average variable interest rate to the lowest one available could potentially save you a whopping $9,298 over time if hypothetically rates continue to climb.
Homeowners should be aware that when their fixed period expires, they may revert back to the lender’s current standard variable rate. This is usually higher than what they secured during the earlier years and could become even pricier if interest rates continue to soar.
It’s not too late to take advantage of fixed rate home loans! The savings you could get from switching will depend on your financial standing and the goals for your loan. Even though fixed rates have been climbing, there is still a chance that by locking in a lower rate today you can avoid some of the effects of future interest hikes. However, how much money you’ll save depends on what kind of creditor you go with as well as what their current interests are compared to yours. It pays off to do some research before locking in any deal – it might just save more than expected while securing your finances over time.
Is your credit score or income higher than it was before, and do you have more equity in the property now? If so, refinancing may be a great option for you. Lenders usually favor applicants that possess excellent credit scores and loan-to-value ratios of 80% or lower; therefore if this is true for you today, chances are good that obtaining a refinance with an appealing rate will not be complicated.
Whether you choose a fixed or variable rate home loan, reducing the interest charged on your mortgage could help keep your payments manageable in the next years to come.
