Nell Matzen - 10 Jun, 2021

Banks lifting long-term fixed rates

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Banks are lifting long-term fixed interest rates in a move to gain profits as funding costs blow out on the global financial market.

Fixed-rate loans have been appointed unprecedented low-interest rates, with the big banks offering rates dipping below 2%.

The historically low fixed rates have been a key driving force in the housing boom, with droves of buyers taking advantage.

March 2021 saw the first of the big four to raise their long-term rates, as the Commonwealth Bank lifted their fixed-term rates by 0.2% to 2.19%.

NAB and Macquarie Bank followed suit in early May 2021, offering rates of 2.49% and 2.79%, respectively.

ING, Illawarra Credit Union and BankVic are now the only lenders offering fixed rates under 2%, a stark contrast to the offerings at the beginning of 2021.

RateCity Research Director Sally Tindall said that 25 lenders were offering at least one four-year fixed rate under 2 per cent at the start of the year.

“Now there’s just three, and they’re probably not going to keep these rates long,” she said.

Research by RateCity found that the average four-year fixed rate now sits at 2.54%, up four basis points since January 1st.

RateCity also reported that smaller lenders quickly followed suit, with Bank of Queensland, Adelaide Bank, and Bendigo bank raising their long-term rates in March.

What role does the RBA play?

The long-term rate rise is bucking the usual trend, as rates usually move with the RBA cash rate.

However, the RBA’s announcement that the rate will likely go unchanged until 2024 has seen lenders break with tradition to preserve profits.

Reserve Bank Governor Phillip Lowe said that the rate would be raised when inflation targets are met.

“The Board is committed to maintaining highly supportive monetary conditions until its goals are achieved.”

“The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range.”

“For this to occur, wages growth will have to be materially higher than it is currently.”

“This will require significant gains in employment and a return to a tight labour market.”

“The Board does not expect these conditions to be met until 2024 at the earliest,” he said.

What do the banks say?

National Australia Bank Chief Economist Alan Oster said a rise in bond yields in 2021 was the likely cause behind the long-term rate rise, but he expected two-year rates to remain competitive.

“There’s been quite a big blowout in four- and five-year pricing. My guess would be that the price of four and five-year [loans] would eventually go up,” Mr Oster said.

Commonwealth Bank Head of Fixed Income and Currency Strategy Martin Whetton said the narrative that rates were expected to rise would continue to have an effect on four-year fixed rates.

“I would not be surprised to see other four-year rates go up in time, because the cost of money at that point has started to rise,” he said.

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What will this mean for borrowers?

As evident from the property market boom, droves of borrowers have used record low-interest rates to purchase a property.

However, many pre-existing customers have also refinanced to lower fixed rates to save money on their mortgage payments and ride out the COVID19 storm.

ANZ Bank’s Head of Australian Economics David Plank said the rise in long-term fixed rates would mean that a swathe of borrowers would see a rise in rates as they move to the standard rate in 2023.

However, Mr Plank predicted that the boost in repayment costs could lessen the need for the official RBA rate rise in 2023-24.

Ms Tindall predicted that 3-year rates would be the next to see a rate rise.

“Three-year rates are likely to be next, potentially in the second half of this year,” she said.

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What can borrowers do to manage future rate rises?

Whether a first home buyer or refinancer, borrowers must prepare for the predicted RBA rate rise in 2024.

These strategies can potentially help borrowers manage the subsequent mortgage repayment increase when fixed-rate terms come to an end.

  • Put it in your diary
    Mortgage holders should make a note of the end date of their fixed term and reassess their finances as it approaches. It might mean adjusting their budget or refinancing to a new fixed-term loan.
  • Budget, budget, budget

Borrowers can prepare for the rate rise by adjusting their budgets sooner rather than later. Trim the financial fat in advance with fewer takeaway dinners and after-work drinks. Acclimatising to a new budget before the rate rise will ensure a smoother transition.

  • Get ahead with extra repayments

If mortgage terms allow, now is an excellent time to make extra repayments. Taking advantage of the current low rates will make the future rate rise less painful.

  • Divide and conquer

If right for their financial situation, borrowers should consider splitting their loan between a fixed and variable rate. This could potentially allow access to more money-saving loan features and lessen the impact of the impending rate hike.

Words by Nell Matzen

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