Fixed mortgage rates set to rise well ahead of RBA rate hike
Home hunters flock to the real estate market due to low mortgage rates warned that borrowing costs could rise in the coming months, even if the Reserve Bank keeps interest rates at historically low levels for the coming years.
While the Reserve Bank has made it clear the spot rate is not going anywhere anytime soon, experts warn homeowners could face higher mortgage rates later this year, with more tightening expected in 2023.
Competitive fixed mortgage rates have likely bottomed out, or are nearing their lowest point, and will rise in the second half of the year, said Felicity Emmett, senior economist at ANZ.
“In the second half of the year, those fixed rates of less than 2% over three years that we are seeing advertised at the moment are less likely to be around [as bank funding costs rise],” she said.
“Cheaper financing is not available forever and that will also affect variable mortgage rates.”
Over the past six months, more than 30% of new loans have been made at fixed rates, with three of the Big Four banks – Westpac, NAB and the Commonwealth Bank – offering two-year fixed-term rates below 2%.
Although ANZ does not have data on the duration of fixed-term loans, it is assumed that a large part of the loans taken out in the last six months will be canceled from May 2023, which means that borrowers will have to withdraw. refinance when fixed rates are significantly higher. and variable rates are also likely to be higher.
“This will represent a tightening of people’s cash flow, but keep in mind, in terms of the ability of people to afford these loans, that banks still have a lot of criteria regarding the ability to manage mortgages and that there’s a buffer there, ”Ms. Emmett said.
AMP Capital’s chief economist, Shane Oliver, said rates for longer fixed-term periods would rise first, noting that the Commonwealth Bank had already raised its rate four years earlier this month – by increasing it by 20 basis points to 2.19%.
“The money market already takes into account [RBA rate] goes up from 2023, ”he said. “It doesn’t have much of an impact on two-year rates yet… but as we move forward through the year, the possibility of rate hikes in 2023 will also start to impact shorter rates. “
As rates rise, Dr Oliver said, there was a risk that some buyers who took advantage of very low fixed rates would run into problems when refinancing. However, he added, neither the RBA nor APRA seemed to care yet as neither interest-only loans nor household debt levels had reached higher levels.
“But as the boom continues, it’s likely we’ll see an increase in growth in credit and interest-only lending, and authorities might start to worry that this will get a little too hot.”
The low rates combined with government incentives created strong buyer demand and price hikes, Dr Oliver said. Therefore, higher rates and the removal of incentives could start to slow the market.
“The next few years are going to be interesting, right now we have a massive boom… but if the interest rate trend has bottomed out and we see not only a cyclical rise in interest rates, but an uptrend In the longer term, you “I have to ask myself what will continue to stimulate the housing market, especially if immigration levels remain low,” he said.
Ms Emmett agreed that the increase in fixed rate lending might ease some of the heat in the real estate market, but noted that this would only tighten lending at the margin.
“I don’t think that alone will be enough to really make a big difference as the rates will always be very low and I know for now that there is an element of fear of missing out. [FOMO] for those entering the market… that’s why I think that by the end of the year we will get the macroprudential measure to slow the market down.
The bank plans house prices increase by 17 percent this year, with the first quarter likely to show the strongest growth, Ms. Emmett said.
Buyers entering the market with high loan-to-income ratios should be sure to factor in future rate hikes, said Steve Mickenbecker, Canstar Group chief financial officer.
“Banks create a buffer … but that doesn’t change the fact that your household budget is up for more repayments [when rates rise],” he said.
“FOMO is back and people are taking risks they wouldn’t have taken a few years ago,” he added. “The difference between a 2% and 5% refund is absolutely huge… [but] many people’s memory is short and people [just] thinks, ‘I can afford that at 2%.’ “
A homeowner who borrowed $ 500,000 on a 30-year loan in principal and interest would pay about $ 1,850 per month at 2% and about $ 2,680 at 5%, according to Canstar’s calculations.
With mortgage rates “more or less” as low as they would be, Mr. Mickenbecker expected to see more people consider securing loans for a longer period, which would cost more but save them from price increases. rates until 2025. Or, alternatively, they could stay on variable rates while they were low and then lock in a longer fixed term when rates started to rise.