Interest rate rises spark call for calm for home loan fixers

Reports of rising interest rates make borrowers nervous but here’s what you should know before you lock in a fixed rate.

Homeowners looking to lock in low interest costs should examine their loan closely as banks increase fixed rates on some mortgages.

Rate rises are expected to gather pace as the world enters a higher-inflation period, but lending specialists say people shouldn’t panic.

Some short-term fixed rates are still falling, they say, but for longer-term rates the only way is up.

Four-year and five-year fixed rates below 2 per cent have almost disappeared, down from 26 different lenders offering them in January, RateCity data shows.

RateCity research director Sally Tindall says there are still great rates available. Picture: Supplied.

An inflation spike in the US this month frightened global financial markets, and some economists believe interest rates could rise faster than previously expected.

RateCity research director Sally Tindall said Australia’s Reserve Bank did not expect its official cash rate to start rising until 2024 “but that’s only two-and-a-half years away”.

“When you’re talking about four and five-year fixed rates it’s no surprise that banks would start to factor that in,” she said.

Banks also had a low-rate term funding facility from the Reserve Bank offering them money at 0.1 per cent, but this was scheduled to end on June 30, Ms Tindall said.

“That takes a funding source off the table and I think banks will raise rates after that,” she said.

“But don’t panic and rush to fix because you’ve heard they are going up.

“There are still some ultra-low rates out there. You may find some banks keep some of their rates low as long as they possibly can in a bid to attract new customers.”

The Commonwealth Bank increased its three-year fixed rate this month and others are expected to follow.

Ms Tindall said the right time frame for fixing depended on each borrower’s circumstances and whether they were planning to sell, upgrade or switch mortgages in the next few years.

“Think about what your plans are over that fixed-rate term.”

Canstar’s Steve Mickenbecker says borrowers prefer two and three-year fixed rates.

Fixed rates have surged in popularity but lack the flexibility of variable-rate loans. They can charge break fees for exiting the loan early, and may not offer benefits such as offset accounts or redraw facilities.

Canstar group executive financial services Steve Mickenbecker said longer-term fixed deals were heading higher but “people don’t have to panic at the moment”.

“Fixed rates are still lower than variable rates,” he said.

“There’s no question that rates will go up again. It’s inconceivable that they can stay where they are now.”

Mr Mickenbecker said most borrowers preferred to fix for two or three years, and those looking for longer terms should check that their bank allowed some flexibility to make extra repayments.

Borrowers can be hit hard by break fees on fixed-rate loans, but this usually happens when rates are much higher. That’s because swapping from a higher-rate fixed loan to a lower-rate loan costs the bank money, but stopping a low-rate fixed loan is nowhere near as costly.

“There’s not much risk at the moment locking in for five years,” Mr Mickenbecker said.

“Don’t worry about trying to pick the bottom. You just want to lock in an interest rate you can afford.”

Originally published as Interest rate rises spark call for calm for home loan fixers