Time to Fix?

A recent surge in the cost of funding term loans has triggered a wave of repricing in the fixed rate mortgage market in the past week.

 

Unlike variable rate mortgages that are linked to the Reserve Bank’s monthly decisions on the cash rate, fixed rate mortgages are priced according to movements in rate benchmarks in the money markets.

 

In Australia, those benchmarks include so-called “bank swap rates”.

 

Since the middle of this month those rates have risen from record lows, and are now adding to lenders’ funding costs (see graph)

While the RBA’s official cash rate was reduced to two per cent at its May board meeting, the cost to banks of borrowing for up to three years on fixed terms in the money market has risen more than 0.2 per cent to 2.25 per cent since April.

 

If lenders want to raise funds for five years on fixed terms they have to pay a rate of at least 2.62 per cent.

 

And, it may well be that these differences between fixed and variable are going to get larger.  If the Australian government loses its AAA rating, the country will be perceived by the money markets to be slightly riskier, investors will expect a higher return before they lend to Australian institutions.

 

While no-one is predicting a huge rise in fixed rates, it is likely that fixed rate loans will reach the bottom of the cycle before variable rates do.

 

So, what are your options?

 

In general, those who opt for variable rates do better than those who fix.  Given that there is still at least one more drop in variable rates predicted, for many, going along for the ride may be the answer.

 

But if you want the certainty of knowing what your monthly repayments will be (even if slightly higher than variable rates), now may well be the time to fix.

 

Some lenders will allow you to do a combination of both – you can even have multiple fixed and variable splits in your loan over multiple time horizons which may help you hedge your bets.  Not all loans allow this, please feel free to call the Origin Finance team to find the right lender for you.