Some borrowers are more concerned than others, says broker
While fixed rates at Australia’s major and second tier lenders have started to rise, variable rates have started to fall, creating a potential point of anxiety for consumers. While borrowers with a good cashflow may be happy reaping the benefits of a falling variable rate, other types of borrowers are less suited to this sort of arrangement, Mortgage Choice broker Cameron Price told MPA.
“Those with fairly good cashflow tend to always stay variable no matter what because they are comfortable with it, they want the flexibility of an offset account, they want to be able to pay as much extra as they like,” he said. “It’s probably either those that are first home buyers or people on a budget that are a bit concerned. They are the ones who still want to fix even though variable rates are low.”
He said whether to fix was a question on most client’s lips after 16 banks raised their fixed rate twice over the last month and Westpac raised its fixed rate three times.
Read more: Westpac hikes fixed rates again
“They’re a little bit worried about what’s going to happen,” he said.
The concern also stems from the heightened speculation of an earlier than forecast cash rate rise. After dropping the cash rate to the lowest it has ever been late last year, the RBA had maintained it would not budge on this until around 2024. At its most recent cash rate announcement, however, Governor Philip Lowe hinted that this could now happen one year earlier.
“Lenders have already put their fixed rates up, they’ve already moved last month and this month,” said Price. “I think locking in cheap fixed rates has been a concern, and that’s not just buyers, that’s people refinancing.”
The change marks an end to the pandemic era of ultra-low fixed rates made possible by the RBA’s Term Funding Facility. This was long touted as a reason the major banks were able to drop fixed rates below 2%. While borrowers witnessed something of a fixed rate war between lenders at this time, the variable rates at most banks continued to remain above their fixed rates. Now, it appears the opposite trend has started to occur.
Daniel Hustwaite from AQUA Financial Services told MPA that this reversal didn’t necessarily equate to variable rates being a better option.
“The fixed rates previously were significantly lower than the variable rate,” he said. “But now with the variable rates going down a bit and the fixed rates going up … all it has done is bring the variable rates in line with the fixed rates. Three to six months ago you could fix in two or three years as low as 1.84 or 1.89%.
“It’s just whether or not fixing now is worth it should interest rates continue to increase in the coming years.”
Aaron Christie-David from Atelier Wealth said the change was confusing for consumers.
“Banks are experts in consumer behaviour so they go and up the fixed rates, but people love security,” he said. “If you put yourself in a consumer’s shoes: ‘why am I going to take a variable rate when they are telling me fixed rates are going up? I might as well lock in my fixed rate now and have that security rather than being left volatile on a variable rate that could increase’.
“It’s such a mixed message to the market – we’re putting fixed rates up but we’re going to lower variable rates - but this is because our cost of funding has gone up. It doesn’t make any sense for a customer.”
In a recent Reuters report, Carlos Cacho, chief economist at Jarden suggested banks were luring borrowers away from fixed rates in order to reap the benefits of an eventual cash rate rise.
“With the prospect of rate hikes now potentially within sight, I think [the banks] will be keen to shift more of the flow towards variable, so they get the uplift on interest rates as rate hikes come through,” he told Reuters.
Read more: Luring borrowers away from fixed rates
Lender strategy aside, the role of the broker will be crucial in ensuring their clients are in the best possible position in line with their goals and objectives, said Brad Cramb, CEO of Distribution, Lendi Group (parent company of Aussie).
“I think the important part here is if you look at it from a customer point of view, fixing rates isn’t necessarily going to be in the best interest of the borrower,’ he told MPA.
While certain borrowers may want the security of regular repayments, others may want the flexibility to make extra repayments, access to an offset account or the ability to refinance to a better rate, he said.
“Our position right now is that with the speed of the rate rises and the challenge of predicting the time, it’s ultimately best to speak to the broker and make sure they stress test any of the options that are available to them,” he said.
Price agrees education is crucial when it comes to navigating the interest rate environment. He said he discusses with his clients the benefits of splitting the loan so that a portion of it is variable while the remaining is fixed.
“We try to educate them on how you can have that split loan, how much you can have on your variable, how much you should have on your fixed,” he said. “We get them to try and do some cashflow forecasting for the next couple of years.”