First, an obvious disclaimer with a subtle plug:
I am not an economist and I am not a financial planner (neither of whom can help you). Like every pessimistic bank economist, click-baiting journalist and even Michelle Bullock herself, I have little idea what interest rates will do or when they will do it. I am however, one of the very few mortgage brokers in the country with nearly a fifth of our clients still (as of May 2024) on a fixed rate under 2.50%!
Second, a few facts and figures:
Inflation is remaining stubbornly high - much higher than the Reserve Bank's upper target. Furthermore, the underlying figures are not showing any signs of putting downward pressure on inflation anytime soon. The price of essentials like food, fuel and housing keeps going up. And most of us have to keep paying for these items regardless of the price. Although it is just a monthly figure and shouldn't be looked at too deeply CPI is at 3.6% and annual trimmed mean is at 4.1%. According to Dan Ziffer at ABC News these numbers are looking very sticky at these levels.
ABC News Finance Report 29 May 2024
What does this mean for me, my mortgage and my family right now?
Forget all the economic mumbo-jumbo - right now your home loan rate is sitting around 6.20% - 6.30% (please call, email or book a chat now if you are still on a higher rate).
If you were to lock in 5.79% this week that would give you an immediate discount of 0.40% - 0.50% or about $2,500 per year on our average loan size of $800k. That is an immediate saving - right now!
Please email me to request a fixed rate comparison or book a time here to chat through your options.
Some experts are suggesting that a rate rise is likely this year, not just possible, but likely! My personal opinion is that the RBA will not knee-jerk react to monthly figures and that on the whole we are heading in the right direction - just a bit slower than preferred. However, if rates were to rise another 0.25% later this year or next you would be saving another $1,200. Effectively, you are shielding yourself from all future rate rises over the next three years.
Now, suppose all the wars stop, and suppose all the rich people without a mortgage (damn baby-boomers) stop traveling and buying trendy stuff, and inflation falls back inside the RBA parameters AND then stays there for a few quarters at least, then the RBA will consider dropping the cash rate. If this happens after a rate rise then the cash rate will simply be back to where it is now - and your 5.79% fixed rate is still looking good.
If the RBA were to reduce the cash rate by 0.25% from its current levels and we assume that the banks pass the full rate cut on to borrowers (which hasn’t happened in a long time), then the current variable rate would be about 6.00%. Your 5.79% fixed rate would still be the winner.
It would take two rate cuts and no rate rises to bring the variable rate down to your fixed rate of 5.79%. Fairly safe to say it is going to take a long time for the RBA to consider dropping rates and if they do decide to drop rates they will do it very slowly and cautiously. They will want to see the effect of the first rate cut before doing another.
There are just five RBA Cash Rate meetings left for this year. The most likely outcome for at least the June and August meetings will be no change or a slight chance of an increase. Towards the end of the year a rate decrease is less likely heading into holiday/Christmas spending season. So if rates don’t move or go up in the next 12 months your fixed rate is well ahead of the curve.
Rates would have to come down and fast in later 2025 or early 2026 for your fixed rate at 5.79% to not be the winner. Worst case rates drop by more than 0.50% below 5.79% in last half of 2025, you would still be breakeven or close. A breakeven or small cost is a small price to pay for knowing your rate is locked in for the next three years. Every headline grabbing article about rate hikes wont send a tingle up your spine or force you to break out in cold sweats.
If you haven't had a mortgage for the past 30 years you may have missed that “normal” interest rates are between 5.50% and 6.50% over any long term view. Mortgage rates at 2%, or 3% are unusual. So please don't think that rates will ever return to these levels anytime soon.
Extra repayments & redraw
One of the problems which many Australians don’t like about fixed rates is that you can’t pay extra off your fixed rate. This is no longer the case with several of our lenders including this 5.79% lender. They offer no cost extra repayments and no cost redraw. Making this fixed rate very attractive. Note if you did have a windfall you could not pay the mortgage out. You would need to leave $1 in the loan until the end of the three years or pay the break costs if you really wanted your title back.
As I said at the start - I don’t know what will happen to rates in the next three years. I will eat my proverbial hat if rates come down before March next year. Meaning at least ten months savings locked in.
Should you wish to investigate this topic further please email me to request a fixed rate comparison or book a time here to chat through your options.
Please keep in mind that lenders with rates at these levels are quickly disappearing. A few weeks ago we had about ten lenders with rates below 5.90%. This week there are just five lenders with these fixed rates.
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