Why now could be the very worst time to fix your mortgage

Forget the fixed rate “cliff”, the now-common buzz phrase for the phenomenally steep aftermath faced by Aussies smart enough to sign set-interest contracts when rates were at COVID lows. Most mortgage holders have now either successfully scaled or – sadly – fallen down it.

Today, Aussies locking in their home loans risk altitude sickness.

Many of the big banks have dropped their fixed rates, but don’t be fooled.Credit: Simon Letch

Just as they have done at this point in every previous interest-rate cycle, lenders are trying to lure borrowers with cheap fixed rates. Except that we are very possibly at the interest rate peak.

Since the beginning of September, there’s been a huge shift in home loan rates. As of Friday, a massive 31 lenders had cut two-year fixed rates and 27 lenders had cut three-year fixed rates, according to Mozo data.

The likes of ING, Macquarie and Bankwest join the big four banks, which have been slashing three-year fixed rates since July (ANZ is still yet to materially move). Most cuts have been around 20 to 30 basis points.

Don’t fall for it.

When you fix your home loan, you are betting against a bank that you know better than it does.

The thing is that this new pricing reflects growing confidence that the RBA’s next move will be down … and springboarding off what is happening with interest rates, lenders always price for profit.

Though the first cut is unlikely to come this year, and Reserve Bank governor Michele Bullock keeps telling us there’s no near-term prospect, 44 per cent of respondents to Finder’s interest rate survey expect rates to be cut at the central bank’s first meeting back next year, in February.

And some outlier economists forecast as many as four decreases next year. But let’s back up and check my two-step, pass-fail, traffic-light test for whether you should fix.

Traffic light test 1: Fixed rates are lower than variable rates

There are three-year fixed rates as low as 5.49 per cent versus a best-in-market 5.89 per cent variable rate (this is the cheapest variable rate for a quality loan with a genuine offset account – the only type I would consider). So it’s a green light here right now. But …

Traffic light test 2: The expectation for the future direction of interest rates is up

And, yep, this one is in no way a green light. It’s more like a red flag.

Even though you would save money today by committing to a fixed rate, very soon you may be contending with higher repayments than if you’d kept riding the variable wave. You’d be effectively throwing away money but stuck on a higher-interest contract.

If you are undeterred though – maybe all your other life costs are so high that you want repayment certainty – heed my two golden rules of fixing:

Golden rule 1: Only ever fix half your mortgage

When you fix your home loan, you are betting against a bank that you know better than it does, the future direction of interest rates … better than its economists and better that its product/profit architects. And in gambling, you know what they say about the “house” and winning.

I recall so many distressing phone calls with people who were discomforted by a succession of rate rise just before the global financial crisis – and locked in their loan. Official rates had pushed above 7 per cent and mortgage rates higher than 9 per cent.

But remember what happened when the world was teetering on the economic brink? Rates were slashed more than 400 basis points to a then-emergency low of 3 per cent.

It didn’t matter though … the poor people who had fixed had to pay astronomical rates for the remainder of their deal.

Golden rule 2: Only fix for a maximum of three years

Interest rate expectations can turn on the head of a pin. I just mentioned the GFC – but recall the Reserve slashing that took place on pandemic panic, all the way to an official 0.1 per cent.

For those who cleverly made lock-in bets then, the fixed rate cliff only came at the end of the contract.

Punt on a fix today though, and you might endure altitude sickness – and nosebleed repayments – for almost all of it.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, X and Instagram.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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