Chapter 1: What are the current trends in mortgage rates in Australia?
It's The Real Estate Podcast, brought to you by Ray White, the largest real estate and property group in Australasia. And welcome to another episode of The Real Estate Podcast, available on iHeartRadio, also on Google and Apple Podcasts, or wherever you get your podcasts from. Okay, let's have a look at the main centre forecast with propertybuyer.com.au for Wednesday, the 23rd of March.
And in Sydney, expecting showers today with a high of 24 degrees. A little cooler in Melbourne, expecting light rain with just 19 degrees. Brisbane, expecting a fine day with 31. And in Perth today, expecting a high of 29 degrees and a mainly fine day. And all eyes are going to be on mortgages in the next 12 months across Australia as the cash rate looks to increase.
And I've said it before, we have a generation of home mortgage borrowers who have only ever known mortgage rates to be going down. So what happens to most of these borrowers is going to be unprecedented, virgin territory, and let's face it, potentially a volatile situation if they've borrowed heavily to get into the property market, which really is most of them.
Chapter 2: How do fixed rates compare to variable rates in today's market?
And to lean into the conversation, I'm joined this morning by Steve Mickenbecker from Canstar. Good morning, Steve. Good to have you on the Real Estate Podcast. Good morning, Craig. Great to be here. And to my point about a generation who have borrowed heavily, the fixed rates are moving up, but the variable rates seem to be more stable by comparison.
What do you think is likely to happen in that space for, say, the rest of this year? We have seen massive increases in fixed rates. They're up sort of 1.3%, 1.4% from their lowest point. I can see that continuing over the coming year.
Chapter 3: What impact do cash rate increases have on variable mortgage rates?
I think it's going to be a gradual rise. The banks are just gradually adjusting and sometimes they're moving twice in a month. So we'll see that continue for quite a while. But then one day, the Reserve Bank is going to push the button on a cash rate increase. And at that point, we'll start seeing a lot of action on the variable rate. So fixed rates continuing for a while, continue to go up.
But then sooner or later, probably later part of this year, the Reserve Bank will move and we'll start seeing variable rates go up. And that will be a shock because that will affect existing borrowers as well as new borrowers. Yeah, we'll get to that cash rate in just a moment. Now, banks seem more prepared and more likely to give away margins with variable rates as opposed to fixed rates.
Chapter 4: Why are banks more likely to adjust variable rates over fixed rates?
Can you explain to our listeners who might have an existing mortgage or to anyone who is currently thinking about getting a mortgage why that is? Yeah, one of the things that people probably haven't focused on because they've never seen rate increases is that the bank can actually increase your rate whenever they want to if it's a variable rate.
Now they get into trouble if they do it outrageously, but they can still do it. They have the right to do it and that's because they're borrowing short, so short-term borrowings to lend to you over 30 years. Now, the bank is very comfortable at this stage in the interest rate cycle with rates as low as they are, but about to go up.
They're very comfortable adding to their loans, writing loans on the variable rate in the full knowledge that in six or 12 months time, they'll be increasing your interest rate.
so look it will happen the other problem that people might not be ready for is that when the reserve bank starts moving off a bottom of the bottom rates normally rate increases come in clumps so it's not just going to be 0.15 or 0.25 increase it's more likely to be a two percent increase or a 1.5 percent increase over the next couple of years And that adds a lot to the repayment.
And just to give people an idea, to move from an average rate today to one that's 2% higher on a million dollar loan is another $1,100 odd per month. So a very big number to find in the household budget.
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Chapter 5: What should borrowers consider when choosing between fixed and variable rates?
Yeah, so you actually raise that good point that the fact that the cash rate isn't tied in any way to the variable rate means, of course, that the banks can increase those rates as you're talking about. But that sort of begs the question, in this moment that we find ourselves right now, do you think it's better with a shifting fixed rate to pay that extra amount?
Look, this is such a tricky call for people. The three-year fixed rate is 0.35% on average higher than the variable rate. It's not a huge amount more, and it's probably worth paying that sort of increase, that 0.35%, 0.36% more, to lock in for the next three years. That's a good idea if that's what the rates look like. However, that's comparing an average fixed rate and average variable rate.
You can do a lot better than the average variable rate at the moment. The lowest variable rate is 1.77%. Canstar lists 60 variable rate loans below 2%.
Chapter 6: How can refinancing affect monthly mortgage repayments?
Now, if you're paying the average fixed rate when you could be 1.35% better, borrowing below 2%, you're sort of front-ending the high cost. You're paying a higher cost now for the next year, maybe two years, hoping to get it back later on. There's quite a risk in going fixed at the moment.
The variable rates are so low right now that a lot of people are going to say, well, I'm not going to pay that extra bit up front. Maybe I'm better off just putting it in the bank, getting ahead with the loan for the time when the variable rate eventually goes up. The trick is get into a low variable rate if you're going to stay there. And what about the refinancing?
This is always a bit of a problem because I've never really understood why a lot of people don't look for a better deal when it's available and can be secured when looking at mortgage rates, which can make a real difference to a monthly mortgage repayment. But instead, people just seem to stay with their mortgage provider or even worse, they won't even challenge the terms.
Chapter 7: What advice is given for borrowers coming off fixed-term loans?
thinking that they can't do anything about it. So they just stay with the status quo. How active do you think people should be in this space looking for that better long-term mortgage deal? Look, refinances are way up on last year, but nowhere near as high as they should be. And I think people who've been in their loans for six, eight, 10 years, remember rates at around 7% or 8%.
They think, look, I'm on a great deal now. I'm on 3% or 3.5%. 3.5% is a terrible deal right now. So more people should be refinancing. If you're on the average rate and you move to the lowest rate in the market, which is only 1.77% variable, you save yourself around $629 every month on your repayment. You've got to look at it.
You can't just be lulled thinking you're on a good rate because you remember the bad old days. Chances are If you haven't done anything about it in the last couple of years, you're paying way too much and you must get in and do your proper research. Yeah, so really good points.
And I think the point should be made about those number of people who soon will be coming off that fixed-term loan, which they have been on for the last one or two years. For the very first time, they're arriving on that different side of the coin, and that's really going to pose a lot of problems. And then, of course, we've got the oil.
I don't want to talk about the oil problems just yet, but they're coming into a bit of danger area, potentially. They are. Look, if they come off it today, they'll be looking at the interest rates we've got today, and there are low variable rates out there. So they'll have a little bit of respite, and they might even actually end up on a lower rate than they're currently on.
If they come off their fixed rate in another year's time, they'll be coming off in an environment where interest rates are on the way up, and they could well be on a higher rate and be looking for an extra repayment, a larger repayment every month. So be ready for it.
Even if you fixed today, let's say you fixed for a year or two years today, you'll probably come off in a higher interest rate environment. There's a real trap in coming off fixed and that is you cannot just let it revert to the rate that the bank originally set up because that's going to be variable rate and chances are it's going to be their standard variable rate.
And that could be 2% higher than you've been paying on fixed. Do not just let it roll over. Make sure you compare rates and get a decent rate when you come off, whether it's another fixed rate or you go into a much lower cost variable rate loan. Hey, Steve, some great information there. Thanks so much for coming on to the Real Estate Podcast. Thanks, Craig. Enjoyed it.
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