- Sydney’s Credit Mortgage Loan Interest Rate Predictions: Impact On Profit
- Fixed Interest Rates
Sydney’s Credit Mortgage Loan Interest Rate Predictions: Impact On Profit – That’s a question many mortgage holders are currently facing as they look to buy or refinance their home loan. In the last 2 years, the difference between fixed and variable interest rates has not been significantly different, in fact, fixed interest rates have been incredibly low. Until now.
In the last 2 months, fixed interest rates have risen sharply. The question is why? Are banks providing a safety net for mortgage holders or are they profiting from the fear of rising interest rates?
Sydney’s Credit Mortgage Loan Interest Rate Predictions: Impact On Profit
The cash rate before governments started locking down their countries to avoid the spread of Covid (December 2019) was 0.75%.
What Influences The Interest Rate On My Home Loan?
Because we all have to remember that right now we have the lowest cash rate ever. Perspective needs to be kept in check when discussing how many people will default on their mortgages when the cash rate and interest rates rise. Fear and panic are not valid, and we will explain why.
For those who aren’t in the industry or haven’t recently been through a home loan approval, bank interest rates are the interest rate a bank uses to estimate how much you can borrow – in a stressful situation.
This means, when the bank calculates your borrowing capacity, it takes the interest you will actually pay and adds an additional 2.5-3% to that interest. Compound interest rates are what your mortgage payments are calculated on.
For example, based on an $800,000 owner occupied loan, on a P&I repayment with an 80% LVR, this scenario could apply
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This means that while the borrower would only pay the mortgage payment at a rate of 1.96% (estimated at $678 per week), the bank estimates your mortgage payment as if it were 4.46% (estimated at $930 per week).
This means that if your income supports the repayments as if they were $930 per week, the lender will approve the home loan approval. If your income does not support repayments at that level, then the bank will refuse approval.
This buffer is important when it comes to volatile increases in interest rates. Because interest rates are variable, banks know that rates will increase at some point in the future, so they factor in a buffer to ensure that the borrower can absorb those increases.
And the banks covered it. When assessing your ability to repay the loan, they take into account your living expenses according to the HEM (Household Expenditure Measure), which is a calculation based on standard living expenses for your situation. If your actual living expenses are lower than the industry standard HEM, the bank will automatically apply the HEM amount instead of your actual expenses to ensure you still have enough income to cover your repayments.
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One of the benefits of working with a mortgage broker like Mint Equity is that we negotiate with the bank on your behalf to get a lower interest rate than what is being advertised. Most people don’t realize that the advertised interest rate on the bank’s website is higher than what we can get on your behalf.
‘Rates’ is a term we use in the industry – where we ask the bank for better rates than their advertised rate. 9 times out of 10 we secure a discount on their advertised variable interest rate, passing that savings directly to our clients.
Most variable rate loan products come with offset benefits, which means that if you receive irregular income (such as bonuses, overtime or dividends), the money in your linked offset account reduces your loan balance and therefore the amount of interest you pay on your loan.
For example, if you have a home loan balance of $250,000 and you have $10,000 in your 100% offset account, you will only pay interest on the home loan balance of $240,000. Since interest on your home loan is calculated daily, every dollar in your offset account can save you money in interest. This means that more of your repayments go towards paying down the principal, helping you to pay off your home loan faster. Offset benefits are not available for a fixed rate loan.
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Loan products with a variable interest rate also make it easier and cheaper for the borrower to pay off their loan without penalty. For example, if they sell their property, they can just pay off the loan and pay a small release fee. If they were on a fixed interest rate, there would be break costs for early repayment of the loan. This can sometimes be a significant expense depending on the difference between the original fixed rate and the current rate. The remaining term of the loan will also affect the fees charged.
One of the advantages of using a variable interest rate is that the rate is always up for negotiation. That’s why Mint Equity has a dedicated team that reviews all of our clients’ interest rates and property values every six months. This means that we proactively approach the lender and ask for a discount on their interest rate. Depending on what’s happening in the market, the lender might agree to drop the variable interest rate by a few points, especially if there’s another lender offering a lower rate. Every day we save our customers money on their home loans by proactively reviewing their options to ensure they have the best interest rates.
If the borrower has a fixed interest rate, you cannot ask for a discount. You must wait until the end of the loan term to change the rate.
Now that we’ve covered the reasons why some people choose variable interest rates, let’s go back to the fact that interest rates have been at an all-time low for the past two years.
Interest Rates: How Much Your Mortgage Is Likely To Go Up This Year
So, how many interest rate increases would it take for us to make the fixed interest rate choice more financially sustainable?
The beauty of fixed interest rates is that they are fixed. That’s the long and the short of it. You know exactly how much your fixed-term mortgage payment will be.
Here are some of the lowest fixed interest rates from the biggest banks on the market right now. Note: Cheaper fixed interest rates are available from second-tier lenders.
The problem we now face when it comes to the decision process is that fixed interest rates are now much, much higher than variable interest rates.
Fixed Interest Rates
With variable interest rates starting at 1.96%, almost a full 1% lower than a one-year fixed rate, deciding whether to go for a variable or fixed rate can be difficult.
Westpac updated their interest rate forecast this week and now expect the RBA to raise the cash rate by 0.4% (40 basis points) in June.
That would bring the current cash rate from 0.1% to 0.5%. While they forecast an increase in the cash rate to 2%, which appears to have plateaued from June 2023 to December 2023.
The RBA has indicated that it would like to increase the cash rate as inflation rises and restore the extraordinary interest rate cut introduced in 2020. Both the Bank of Canada (April 13) and the Reserve Bank of New Zealand (April 13) opted for a 50 basis point hike, which Australia’s RBA referenced in its latest meeting minutes, giving an even stronger indication that a cash rate hike is on the way .
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However, it is important to remember that this is Westpac’s forecast. They are in business to make money from the products they sell. Therefore, it is in their best interest for borrowers to be tied to a fixed interest rate that may be higher than a variable rate. With the cash rate forecast to rise over the next 2-20 months, many borrowers are becoming fearful and opting for fixed rates. This could be the right choice for some, but if we look at how those increases that Westpac have forecast apply to the standard variable rate, you can see that some fixed rate options are more expensive for the borrower. You’ll also see how equity rates differ from interest rates on investment properties.
And the final piece of the puzzle is that the cash rate is just an indicator of what banks might do with floating interest rates. Banks have already increased floating interest rates without the RBA’s cash rate moving. For example, St George increased its base variable rate by 1.74% on 24 March 2022 and ANZ increased its standard variable investment (I/O) rate by 1.20% on the same day, so interest rates were already rising without any movement from the RBA.
In return, when RBA lowered the cash rate four times in 2020, some banks did not fully pass on the rate reduction, which is a reminder that banks will do what they want and when they want.
There are a few situations where variable or fixed might be more useful for your situation. If these statements resonate with you, you may have your answer;
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Remember, you can always hedge your bets by splitting your loan over both variables
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