Over 12 months ago, our view was that anyone with a mortgage should consider fixing the interest rate on their owner occupied or investment home loan for at least 3 years. Our rationale was that if elevated inflation metrics did not turn out to be transitory in nature as most central bankers around the world were arguing at the time, interest rates would not remain at record lows for much longer.
Fast forward to April 2022, there is now a strong market rhetoric seducing borrowers to fix the interest rate on their loans at any cost. Meanwhile, fixed rates have risen significantly and quickly by stealth. Rate rises are even occurring now while borrowers are patiently waiting for assessment of their loan applications by their bank.
Although for some borrowers there remains significant benefits when fixing rates (such as budgeting or an emotional decision rather than financial), at this juncture one should carefully consider the benefit-cost of choosing fixed rates over variable. The median 3- and 5-year fixed rate for owner occupied loans is currently 4.40%pa and 4.80%pa respectively. As the median variable rate is currently 2.20%pa, the rate differential is 2.20% and 2.60% over 3 and 5 years respectively.
So, what does this all mean? Well, banks are charging borrowers a hefty premium to lock in rates, i.e., peace of mind. However, anyone considering fixing their home loan for say 5 years will be paying more than double in interest charges from loan inception. To justify paying this premium, the Reserve Bank of Australia would need to increase the cash rate by 0.25% more than 10 times for them to break even and these rate rises would need to occur early in the 5-year fixed term for the strategy to be financially advantageous. While this is possible, we consider it highly unlikely.
At Convergence Wealth, our clients’ best interest is always front of mind. We ensure that our clients are fully informed when making financial decisions especially when market irregularities persist such as the case right now with home loan rates.
If you are searching for the right home loan or if you are thinking of refinancing your existing loan, Convergence Wealth is ready to support you. Our reach extends to most lenders in Australia.
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