Home loan fixed rates climb again, so should you lock in now?

The Reserve Bank’s official interest rate hasn’t budged for a year, but fixed rates have a mind of their own. Here’s why.

Higher variable interest rates may be a few years away, but fixed rates are rising.

The Reserve Bank of Australia says it doesn’t plan to raise its official interest rate before 2024, but fixed rates for mortgages continue to climb.

Earlier this year, borrowers could get fixed rates below 2 per cent for four and five-year terms. That opportunity has long gone, and many banks have increased their fixed rates in the past month.

However, more lenders are dropping their variable rates, with research group Canstar finding more than 40 have done this since July 1.

If you’re scratching your head as to why we have these wacky rate changes when the RBA’s official rate isn’t budging, don’t worry because you’re not alone.

There are two words that probably describe it well: bank boffins.

The number crunchers employed by lenders are constantly fiddling with their rate levers as they respond to customer demand, competition and their outlook for future rate moves in Australia and overseas.

Many people incorrectly think mortgage rates are tightly tied to the RBA’s cash rate, which has been 0.1 per cent since November last year.

But in fact, it’s really just a guide.

Trying to beat banks’ fixed interest rate timing? You’ll have to beat their financial boffins.

WHY FIXED RATES ARE UP

The RBA’s cash rate affects short-term money markets and variable mortgage rates. But longer-term fixed rates more often reflect where banks and financial markets think rates will be a few years from now.

Interests rates are used as a tool to cut inflation when it’s too high and raise inflation when it’s too low – not that it has worked very well in recent years.

Inflation has been surging in the US, and much of the world follows the US lead. So there’s a growing belief American rate rises to control inflation will spread to other countries, including ours.

Canstar says Australia’s higher fixed rates over three, four and five years suggest banks believe the RBA will raise its cash rate before its 2024 time frame.

And the lower variable rates suggests banks prefer to offer them because they can immediately be lifted if the RBA jumps earlier than expected.

SHOULD YOU FIX?

Most people fix to add certainty to their repayments, or to lock in a rate that’s lower than the current variable rate.

There are now four times as many fixed rates below 2 per cent as there are sub-2 per cent variable rates, but they’re mainly one and two-year fixed rates.

We know the RBA doesn’t expect to lift rates for more than two years, so there’s no huge benefit in fixing for shorter-term time frames.

Of course, you could fix for four or five years at below 2.5 per cent if you think rates will surge higher in a few years. But no economists are tipping rate rise shocks, and it’s unlikely households and the economy could handle stiff increases.

When you fix, you are often betting you know more than the bank boffins who live and breathe this stuff, and chances are you don’t.

But if it’s certainty you want, they’re certainly an option – and don’t worry about missing the boat on the lowest fixed rates. Whether you pay 2 or 3 per cent interest, it’s still much lower than the average interest rates of the past 30 years.

Originally published as Home loan fixed rates climb again, so should you lock in now?