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Hello and Welcome. This is Paul Pappas from Mortgage Choice. Today I want to talk about something that is not necessarily receiving the level of coverage that it should be getting, but it’s something that is going to be affecting all of us in the coming months. So today I want to talk about giving you some information and education so that when you do need to make a decision for your own situation in the coming months that you’ve got the right level of information and plenty of time to give yourself good consideration as to what you should be doing. So the subject I want to talk about is rising interest rates, what’s going on, what you should be doing, and giving you the right level of information that you need.
What’s been going on lately? So it’s fair to say that fixed interest rates have been increasing quite sharply in the last number of months, but variable rates have been staying steady. Why? What’s been going on? Let’s have a talk about that.
The Reserve Bank is continuing its strategy of basically not changing its cash rate at 0.10%. So this is why the media hasn’t been giving it any coverage because the media just focused on the Reserve Bank cash rates. But in fact, there’s been some severe changes going on in the mortgage lending market, especially with interest rates that we’ll talk about in a tick. Lenders are still very keenly fighting for your refinancing dollars and they’re very keenly offering $3,000 odd dollars, in some cases a little bit more for your home loan.
So something you should be giving consideration to when you’re looking at reviewing your home loan and looking at incentives. The gap between fixed and variable rates has in fact flipped, whereby now fixed rates are more expensive than variable rates. So, let’s have a look and see what’s been going on if I just get my little pointer going here. Okay. So what I want to focus on here is the yellow, yellow, Gray, Orange and the blue lines here, in particular the Orange and the Gray that represents two and three year fixed rates, but also the yellow line which represents five year fixed rates.
And as you can see from the graph here, these interest rates have really picked up over the last six months, whereby a little while ago it was pretty much a flat yield curve. In other words, the variable rate was pretty much consistent with the 2 & 3 fixed rates. But what we’ve seen over the last six months is that the 2 & 3 fixed rates have risen quite sharply. In fact, the 5 year fixed rate has risen even sharper, but variable rates have remained flat. And we’ll show you why and a tick.
But really what we’re getting at here is this and that is I don’t necessarily want you guys to be alarmed as to what as to where these interest rates have gone, because when we look back here, it’s pre-COVID levels back in early 2018, 2019. The 2 & 3 year fixed rates are really only back to where they used to be. So, this is part of our, I suppose, reconditioning as we come back out of the pandemic and getting back used to the real world and the way that life used to be. And so 2 and 3 year fixed rates are back to where they used to be. So probably not a great cause of alarm, but they’ve gone back to those old levels quite sharply.
But you can still see here the difference between the current difference between fixed and variable rates being in favor of variable rates that are now cheaper. All right, let’s get rid of the pointer and move on.
Okay. So why are fixed rates been increasing so sharply? Well, basically, the Reserve Bank late last year stopped purchasing bonds at 0.10%. So, what the Reserve Bank was doing during its quantitative easing program was flooding the market with money by buying bonds that the banks were then using to lend out cheap money to. So that’s why we saw all variable rates and in particular, 2 and 3 year fixed rates really dropped down quite considerably because the Reserve Bank, the government, was flooding the economy with money and flooding the banks with money to lend out at very cheap levels.
That has now stopped. So what that’s caused is that the lenders have now had to return to normal lending markets, normal wholesale lending markets to borrow their money, in particular for fixed rates.
And what’s happened, of course, is that wholesale bond markets have been increasing quite sharply, not only in Australia, but in fact, around the world. A lot of it is to do with the various central governments stopping and the availability of cash, flooding the markets with their economies with cash. But at the same time, this inflation is starting to pick up not only in Australia, but right around the world. So that’s why you’re seeing fixed rates moving up quite sharply, but variable rates remaining quite flat because the Reserve Bank’s cash rate is still ten basis points. So the real short end of the yield curve as such, is still quite cheap.
But the median, the 2 & 3 year fixed rates have increased quite sharply. So, there’s been a lot of movement in there.
So, the bottom line is this and that is historical sorry, variable rates have still remained at historical very low levels and around 2%. We’ll give you some examples of that in a tick. But seriously, that is not going to keep going for much longer.
So you’ve really got to watch this space because variable rates will not stay at these levels for too much longer. In fact, you will see them moving in variable rates by the end of the year, for sure. 2 or 3 year fixed rate, like I said, before on the graph have basically returned to where they were pre COVID levels. So not a great need of concern and panic. But even though they’ve increased quite sharply over recent months, we’re basically back to where we were.
We need to prepare ourselves for higher interest rates. And in fact, most of our clients have been continuing to pay their home loan off as if interest rates were 3% or even 4%. And in fact, that’s the best advice we’ll give you keep your interest, your repayments up at those higher levels, especially a lot of our clients have been doing so as rates came down. So just condition yourself for interest rates probably closer to 4% by the end of the year, who knows? But making sure that you do your own budget.
So keep your repayments strong or pump your offset, pump, your redraw facility, whatever the case might be. Like I said before, the lenders are still paying good incentives. But look, any questions or any concerns that you do have, please make yourself available to us. We’ll certainly make ourselves available to you to talk about your own situation and how it may affect you and what decisions you need to make and what considerations you need to have.
So let’s have a look at interest rates and what’s been going on out there at the moment.
So look, I’m not going to cover these in a great level of detail, but what I do want to cover here is this and that is I want to demonstrate to you were fixed interest rates are at the moment versus variable rates. You can see it is variable rates around 2% if not a little bit lower in some cases, especially if you’ve got a low lending ratio or LVR below 60%. And you can obtain variable rates below 2%. But your fixed rates for two and three years are around this 3% level. So you’re currently paying a 1% premium for fixing for 2 or 3 years.
This gap is not going to be around for long. I would suggest that this variable rate gap is going to start getting closer. So the decision as to whether you should be fixing or staying variable, it’s actually a very good discussion and something that we can definitely have a chat to you about.
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.
But again, what you’re seeing here is a return to pre-COVID levels when it comes to your fixed rates. So, look, as always, do talk to us. We’re here for you. We’re here to give you as much information as you require to make some good quality decisions and how it’s this will affect you and how you can best protect yourself. But like I said before, we’re just getting back to where we used to be in terms of interest rates.
So please keep in touch with us. We’re certainly available for you. All the very best. 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 – 24/03/2022