Watch our May 2022 Update
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Hello and welcome. This is Paul Pappas from Mortgage Choice. Welcome to a very special edition and an update on interest rates. There’s been a bit happening lately. So exactly what has been happening? How will it affect you? And most importantly, what can you do about it?
So let’s have a bit of a look and have a bit of a discussion. Firstly, what has been happening lately?
As you know, the Reserve Bank earlier this week increased its cash rates by a quarter of the cent, and the lenders have pretty much all slowly but surely passing that on to increasing their variable rates accordingly by the same margin of a quarter of a percent.
We’ve got to remember this is the first interest rate rise that we’ve seen for around twelve years. So many people, many of our borrowers, would not have been accustomed to living in an environment of higher interest rates. So we’ve not seen this situation for quite some time. So how can you adjust and so forth, and how will it affect you? We’ll talk about that in a tick.
We’ve got to remember one important thing, and as we are coming off, some very low record, low interest rates that were caused by the pandemic. So what we’re seeing now, I should say, is that this is part of the adjustment as we enter the new world, whatever that’s going to be, and however that’s going to look. But this is part of the process of higher inflation and higher interest rates, and a lot of it is the higher interest rates and the incentives that were provided by the governments are causing some of this. But it was always going to be inevitable because the governments around the world and certainly in Australia needed to encourage us to spend more and to help the economy and boost the economy during the pandemic.
We’ve already seen some fixed rates increase and we’ll show you exactly what’s happened here in a tick. But some of the media coverage has been poor on interest rates because the media has not really covered the fact that interest rates have, in fact, been moving upwards for about six months now and show you exactly what I’m talking about in a tick. Lenders are still fighting for your dollars for your business, I should say, and that is they’re offering up to $4,000 for you to reconsider and review your home loan and potentially refinance to them. So there are still some very good incentives out there for you to consider in terms of refinancing your home loan. The gap between fixed rates and variable rates has widened as you’re about to see whereby because of the increases in fixed rates but variable rates have been fairly stable.
The gap between the two is now very much in favor of variable rates. One thing we’ve got to remember when it comes to borrowing affordability and overall affordability of mortgages and people buying property and so forth, is that lenders are still assessing at 5.50%. So that’s about 3% above where interest rates are today. So it’s a very important thing that nobody seems to be taking a lot of notice of.
But in terms of conducting their own assessment, lenders are required by regulation to assess at least five and a half percent. So that’s quite a good buffer that lenders are required to do to ensure that people don’t overborrow.
So let’s have a look at interest rates and exactly where they are and what they’ve done over recent times. Let’s just go straight across to the right-hand side and you’ll see there the yellow, Grey and Brown lines of the fixed rates for two, three and five years, respectively. And you’ll see the significant increase that we’ve seen in the market in those rates over the last six months.
Like I said before, the media has very poorly covered this. In fact, they haven’t covered it at all. Whereas the blue line, which is the variable rates, have remained very stable and static. And in some cases earlier in the year, we actually saw some variable rates reduced. So what we’ve seen in the last six months is a very stable environment when it comes to the variable rates.
But fixed rates have already increased. But let’s just put this into perspective a little bit. And if you just have a look at the middle of the graph there and look at the fixed rates and go back to about middle of 2019 or thereabouts, what’s happened with fixed rates is that basically we’ve returned to where we were three years ago, middle of 2019. So fixed rates are very much just returning back to where the levels that they were variable rates look, the gap there on variable rates getting back to the right hand side, variable rates will be increasing over the rest of this year and into next year. So the gap between fixed rates and variable rates will be narrowing.
How much will variable rates go up by look, it’s a guess. It’s a very good guess. But those variable rates will start rising accordingly and that gap will close right up.
So what should you do? And this is a very important discussion that you need to have as well, and that is that you definitely need to give some very serious consideration to paying more on your loan. And in fact, most of our clients, our existing clients and our new clients, we’re recommending that you have a good portion variable to allow you to pay more off, as if rates were higher at 3.50%.
In fact, most of our existing clients are already doing that. I think they’re all doing it. So what that does is create buffers for you to cover you as interest rates do increase, so that if interest rates do go to 3.5%. 4%, it actually doesn’t affect you because you’ve already covered it in terms of your monthly repayment. So we’re definitely recommending and we’ve been recommending this for years to be perfectly Frank, to stay ahead on your loan by making those extra repayments and taking advantage of either 100% offset account or a regional facility or both.
And all of our clients have been doing this so that they’re not stressed when interest rates do increase. And it’s a behavior that we’ve been encouraging all of our clients to do for day one and for quite some time. And in fact, as interest rates have been coming down, we’ve been encouraging interest rates, sorry clients to continue their minimum repayments at a higher level. So definitely continue to make extra repayments on your variable rate loan as if interest rates work higher.
Listen, you don’t have the buffers that you’d like to have, then certainly you can consider looking at some of the fixed rate options that are available to give you some peace of mind and some security to cover you in the event that interest rates do rise further and to give you some security as well. But look, at the end of the day, please do talk to us. Over the last couple of years, and certainly during the pandemic period, we spoke to a number of our clients about exactly their own situation and what you should be doing and how the situations are affecting you. We are definitely here for all our clients to work out exactly what you need to do in your own situation. So please do not hesitate to contact us as well.
But let’s just all put this into reality as to exactly where we are and where we’re going. And the first thing we would always say is certainly don’t panic. Like I said before, we’ve been educating all our clients and recommending to all our clients to be to pay more off your loan. Just continue to do so. Do your budget pay your loan off as if the rates are high and it’s behavior that we’ve been educating our clients for a long time, as I said before.
So the current situation is actually not affecting a lot of our clients to the extent that has been covered in the media and so forth. But if you want to have a look at to see exactly how increased interest rates could affect your repayments and what your exact numbers are, just pause the video with a tick when you have a moment and just scan that particular QR code. It will take you to our onsite calculator so you can play around with that to work out some numbers for you. But as always, if you really want someone to work with you on that, please do not hesitate to give Ryan and myself a call to talk about your own situation, but continue to make extra repayments. Okay, we shouldn’t forget, as we said earlier and highlighted earlier in that graph, that variable rates are still at historical lows.
We are very much here for you.
So quickly, just giving you a bit of a rundown as to where interest rates are at the moment. I’m not going to go into these interest rates in a lot of detail but what I suppose would like to show you is and demonstrate is the gap between variable rates and the fixed rates. You’ll see that with a two year rate you’re paying a premium, about one and a half percent, probably 2% on a three year fixed rate
Investors. Look, again, I’m not going to go into a lot of detail here as far as actual interest rates are concerned. But again, you’re seeing the difference here in fixed and variable rates.
Have a scan of that QR code to book an appointment with either Ryan or myself and we very much look forward to talking about your own situation and giving you some advice and giving you some recommendations.
Thank you for listening in and enjoy the rest of your day. Thank you. Bye.
The information in this presentation does not constitute financial or legal advice. It is of a general nature and doesn’t take into consideration your individual financial position or objectives. You should consider obtaining independent advice before making any financial decisions.
Rates are subject to change – 05/05/2022