In response to an impending recession during mid-2020, the RBA’s decision to cut the cash target rate to 0.10% has until now warded off potential economic devastation. This has effectively, cut interest rates over the past year, which has prompted a number of Australians to consolidate their debts and make the switch to fixed interest loans, as opposed to variable rate loans, to take advantage of cheap loans and low costs on loan repayments, in addition to locking in their interest rate cost as a hedge against future rate increases.
This strategy on the part of the RBA has provided a safe harbour for struggling businesses and individuals, however, competition between banks and second-tier lenders has been ever so quietly pushing up interest rates on a number of fixed rate lending products. As lenders reignite competition within the industry, the question stands, what is happening with interest rates?
Will Interest Rates Change?
For its part, the Reserve Bank of Australia has shown no appetite to increase its cash rate in the immediate future. Does this mean that rates will remain low? The answer is not necessarily.
The market has seen some very cheap interest rates over the past year or so. Given the observed increase in some fixed rate offerings over recent months, have those borrowers currently on variable rates missed the opportunity to capture a cheap rate? Whilst it is true that we are probably past the low point in the market, there remains real value to be had in a fixed-rate home loan.
Banks and other lenders have been slowly increasing rates. This is particularly the case with fixed interest rates – partly due to the fact that so many home loan customers have sought to lock in fixed rates for fear of missing out on low rates before they start to rise. Thus, it is in part competition and increased demand rather than just cost of funds pressure that is driving the current upwards movement in fixed rates. Regardless of the cause, there is strong evidence of increasing fixed rates.
What Does a Change in Interest Rates Mean for Me?
More than half of all home loan customers in Australia have a variable interest rate loan. With pressure mounting on banks to increase rates, variable rate customers could face increased interest costs.
In an environment of increasing rates, it is easy for lenders to pursue an increase in market share by competing at the variable rate level, knowing that they then remain free to increase customer rates down the track. Even though fixed rates have increased, borrowers would be well advised to at least consider locking in a fixed rate while some relatively cheap product offerings still remain available.
If you have any questions regarding this article or are seeking financial advice, our experienced Lending Solutions team at Morrows can provide you with a range of support fit to your needs. Get in contact with us today!
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