Fixed vs variable home loans

There has been a lot of attention in the media about rising interest rates and this resulted in quite a few questions being asked from our clients over the last month or so. We would like to shed some light on the topic and give a little background. In a normal market, fixed interest rates usually sit just above variable rates and this is what we are returning to. When the world was affected by the pandemic, and there was a lot of uncertainty in all aspects of life, banks started to offer very low fixed rates. These fixed rates gave lenders a guarantee around income for a set period of time and initially, we saw this with 4 and 5 year fixed rate terms. As time has passed we saw these very low fixed rates offered over shorter terms, that is 1-3 years. Now that the world is financially more stable and better prepared to handle the challenges that Covid has presented us, we are returning to this more normal market, where fixed rates sit just above variable rates. In the last few months, most banks have risen their fixed rates on multiple occasions and we have even seen a lowering of variable rates across many lenders. Very generally speaking 2 and 3 year fixed rates are still competitive and across the board fixed rates should be discussed as part of your home loan journey.

The next question we are asked often is where do we see rates going. So fixed rates are already on the rise and we expect to see more of this in the shorter term. In terms of securing a very low fixed rate, which is under 2%, those opportunities are no longer available. Variable rates are the lowest they have ever been and in the longer term, we also expect these to rise. Banks largely move outside of the RBA when increasing or decreasing interest rates and the competitiveness of the market has been driving, particularly variable rates, downward. So what is a normal market? We expect, as mentioned in the longer term, that variable rates will eventually sit between 3 and 4% and fixed rates just above this. So what does this mean for people with lending now? It is likely in the longer term your loan repayments will increase and for some, the certainty over the rate and repayment makes fixed rates very attractive. Banks work on a buffer when determining loan affordability and estimate, in the current market, that the loan you can afford now would have an interest rate anywhere between 5 and 6%. If you still have questions and would like to discuss loan options, like fixing at current rates or splitting a portion of your loan to retain some flexibility and certainty to your lending, please get in touch.

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