Banks' fixed mortgage move fuels variable speculation

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The latest move by Australia’s major lenders to raise rates on their fixed mortgages has prompted speculations that the economy has bottomed out and variable rates are about to rise.

CBA, Westpac and ING have all recently increased their interest rates despite expectations of further interest rate cuts by the Reserve Bank of Australia.

CBA added 0.44% to 6.19% to its 3-year fixed rate. Westpac lifted by 0.40% to 5.79% while ING increased it by 0.20% to 5.89%.

“I find it interesting that they have raised their fixed rates because we haven’t seen any significant increases in the bank bill swap rate,” said Lisa Montgomery, head of marketing and consumer advocacy with Resi Home Loans. “The swap rate hasn’t moved significantly since the beginning of April so it’s a bit surprising that we’re seeing these increases in rates. However, we do know that when you see an increase in the fixed rate, we know that’s an indication that rates will not remain in this low environment in the medium- to long-term. But I’m not really sure we’re at the bottom of this cycle yet and it comes as a bit of a surprise to me that we’re seeing these increases so soon.”

Another reason for the rate hike could be the fact that their fixed rate funding costs have risen, but they might also want a larger slice of profit on that product line according to Michael Lee, founder of Key Facts. “Demand might be outweighing available funds, or they may simply want to spook the public. Even allowing for time lag, an increase or decrease in fixed rates is not always a pre-cursor to the same directional movements in variable rates as the two are not directly linked,” he said.

Lee Dittmer, mortgage broker and founder of WHO Finance, agreed and added: “I believe the main reason people lock in rates is because they are concerned that the rates are going to increase drastically and are worried about their cash flow. With the lenders increasing them now, they are banking on that fear factor, to make sure they have the best chance to earn a profit at the expense of their client’s fears!” she said.

So is now a good time to fix?

According to Bill Zheng, CEO of Investors Direct, if you are a first homebuyer and you can’t afford any increase of interest rate during recession, fixing it at around 6% is a smart choice considered the average interest rate of the last 30 years is around 10%.

“If you are a property investor, at 60-80%LVR and 5-6% rental yield, fixing the interest rates at around 6% can turn most of your properties into neutral or positive cash flow for the first time. Most investors would go for a safe bet to fix now than waiting for fixed rates to go down even further,” he added.

Before you take a fixed rate loan, be warned that there is a hefty cost involved if you decide to exit the loan before the fixed term expires.
“I’ve never been a big advocate of fixed rates, because nine times out of 10 the only winners are the lenders – however, in this market, I’d have to say that the three- and five-year rates are still looking attractive and you would have to give them due consideration,” Dittmer said.

It can be confusing to know whether to get a variable rate or fixed rate mortgage, and what features are important. That's why it's important to not only check the right rates, but make sure that you're getting the right features in your home loan. Get help choosing the right home loan

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