February 17, 2022 by Dymphna

Time to fix rates?

The rate cycle has turned. But that’s no reason to panic.

So the rate cycle has definitely turned. Rates aren’t going any lower from here.

Not that I think there’s even any room for them to actually go lower.

But barring another economic crisis, the next move is certainly up. The only question now is when, and how far?

On that measure, I’m hearing a lot of panic in the markets right now. People think rates are going to get a rocket on.

And to avoid that carnage, they’re rushing to fix rates now.

Ok, so a few things. First, let’s not panic.

It’s not certain rates will rise at all this year, and even if they do, it’s probably not going to be all that much.

Take a look at what markets are currently pricing in. They have rates going back to where they were pre-Covid by the end of 2023.

Now, I don’t know if you remember, but rates weren’t particularly high back then. If a few rates hikes like that is enough to crush you, you’re probably over-exposed.

So I don’t think we need to panic.

And I certainly don’t think we need to ‘fix rates at all costs’.

Because there are costs.

The AFR ran a useful article the other day, arguing that it might not make sense to fix right now. Some mortgage brokers argue that people rushing to fix rates whatever the cost are “irrational”:

Borrowers are “irrationally” switching from low-cost variable loans into higher fixed-rate mortgages despite the likelihood they will be financially worse off at the end of the fixed term, brokers say.

The rush to lock in fixed rates is accelerating as more big banks, such as Westpac, ANZ and Citi, continue rate increases that during the past year have added more than 150 basis points to popular four-year fixed rates from the big lenders. Other one- to five-year fixed term rates at the big four banks have risen by 43-125 basis points over the same period.

By contrast, average variable big four home loan rates have fallen by about 33 basis points to 2.24 per cent.

“Just don’t go fixing because that’s what your neighbour did,” warns Sally Tindall, research director at RateCity, which monitors capital markets. “You could end up shooting yourself in the foot.”

“Property buyers are paying an extra 100 basis points for the security of a fixed mortgage rate because they are concerned about rising interest rates and the economic outlook,” adds Phoebe Blamey, director of Clover Financial Solutions, a mortgage broker.

An owner-occupier with a 25-year principal and interest loan could be nearly $7,000 worse off by breaking the term to start a new three-year fixed rate rather than moving to a variable rate at the end of the first three-year term, according to an analysis by RateCity.

That’s before the additional costs imposed by a lender for breaking a fixed rate and new loan set-up costs.

Chris Foster-Ramsay, principal of mortgage broker Foster Ramsay Finance, says other borrowers are switching from near record-low variable rates into fixed rates costing 75 basis points more.

“It’s irrational,” says Foster-Ramsay. “Fearful borrowers are being spooked by all the hype about rising rates into more expensive borrowing products without doing their research and making sure they will be better off.”

Look, at the end of the day finance is one of the most important parts of being a successful investor, and it’s worth having someone solid in your corner.

It’s also worth taking a holistic approach, and making sure that what you’re doing fits with your overall strategy.

But yeah, at the end of the day, don’t panic. The rate cycle has turned, yes, but it’s no reason to rush out and do something silly.