Is it time to set the interest rate on your mortgage?

The Australian real estate market is still hot but it is starting to run out of steam and the question I ask myself is: — is it time to fix the interest rate on my mortgage?

This is a tough question and the correct answer may vary from person to person and loan to loan, but I would say to anyone who has borrowed too much and is planning to keep their home for a long time, that fixing his rate might be a good idea.

Today the Reserve Bank is meeting and what it says about the economy will lead to speculation about when interest rates will rise. But one thing is certain, economists and money market experts believe the RBA’s first rate hike will take place before 2024. Most experts believe banks will raise mortgage rates before the central bank raises the rate official cash above its current all-time low of 0.1. % level.

I know the RBA keeps saying that the first hike in its cash rate won’t happen until 2024, but money market experts disagree. They predict that the first increase will take place in May next year. They might be a little early, but late 2022 or early 2023 seems very likely.

If you need help determining how a rise in interest rates might affect you, watch this from the australian Wealth Editor, James Kirby: “The Canstar Group’s modeling suggests that even a slight increase in official exchange rates, which are coming under increased pressure from bond market traders this week, will significantly increase borrowing costs.

“The comparison service suggests that an average home borrower currently on 3.09% (principal and interest) facing an increase in the official cash rate to 1% (from 0.10% currently) should pay $561 more per year on a million dollar mortgage.

The average borrower is on a 3.09% home loan which could drop to 4%, probably over two years from 2022. This would make a 3 or 4 year fixed rate home loan attractive.

UBank has a 3-year fixed rate home loan at 2.09%, with a comparison rate of 2.19%. Macquarie has a 2.59% mortgage fixed for three years with a comparison rate of 2.29%.

On a variable rate home loan, the comparison rate tells you the actual rate you’ll pay with fees and charges on top of the interest rate, but fixed rate home loans can be confusing.

I would say the best thing someone could do is go to a website like ratecity.com.au and see what you would pay per month on a 3 or 4 year fixed rate mortgage, for example compared to what you repay with your current variable rate mortgage.

If it’s lower or similar, you might consider locking in your payments so you don’t get stung by rising interest rates and higher repayments.

But remember that when you lock in a rate, the bank may charge you a fee to break that loan if you want to sell the property before the loan ends. Plus, when the three or four years are up, you’ll switch to a more expensive home loan.

Another problem is that you usually cannot repay the loan at a faster rate and that is why some borrowers fix half of their loan and keep the other half variable. This is called a ‘cocktail loan’ and means that any interest rate increases will be halved because half of your loan is fixed rate.

The average home loan in Sydney is $750,000 after property prices rose 21% last year and regional prices rose 24%. The median home price is now valued at $1.1 million.

Patrick Commins at The Oz reviewed borrowings across the country. “The average new mortgage commitment in the ACT was $555,000, just below the national average of $574,000,” he revealed. “The lowest average amount of new loans in September was in NT and Tasmania at around $400,000.”

ABC economists believe house prices will rise 7% nationwide next year. It could be less if interest rates rise and APRA makes it harder for homebuyers to borrow.

Meanwhile, Tapas Strickland, who is NAB’s director of economics, is tipping the cash rate to rise from mid-2023, reaching 1.75% to 2% by the end of 2024. If he’s right, maybe a four-year fixed rate might even be better. for those who do not plan to sell their property within this time frame and are concerned about being over-leveraged with a potential increase in repayments.

Ratecity shows that there are four year fixed rate home loans out there, but those interest rates are higher than 3 year fixed rates, so again you should look at the fixed monthly repayments and compare that to what you pay now.

By the way, it might be better to switch from your current variable home loan to a much lower rate loan because when rates go up, you might still have lower monthly repayments than you have now.

Ultimately, if you’re worried about rising interest rates, it’s time to do your homework to protect yourself from a cash flow crisis. And if you don’t have the confidence to do it yourself, try a few mortgage brokers and use what you’re paying now per month along with what you’ll pay with a fixed rate loan as a starting point before you take your decision. .

As I always say, “Anything worth doing is worth doing for money!”

Bernadine J. Perkins