If you are ever going to fix your mortgage, do it now

It’s unlikely that mortgage interest rates will be this low again for a long time. Picture: iStock

If you have ever – ever – thought about fixing your mortgage rate, this is the time. Sweet spots in financial markets rarely last for long. Unusually, we have actually been told when this honeymoon period formally ends: It’s June 30.

As financial adviser Stuart Wemyss, puts it: “We’re only a few weeks out from the end of the period the banks can get super cheap money for fixed term mortgages – it’s now or never if you like.”

Wemyss is talking about the June 30 termination date for the so-called Term Funding Facility, the $200bn crisis-era package that allowed banks to offer fixed rate loans which were so artificially low that they were lower than variable rates

Put simply, the end of the TFF program is the first big step towards our banks going back to normal and funding in the open market, the first repercussion of that will be fixed rates moving higher than variable rates in the short term.

In the longer term it is now more than likely that all rates are going to lift as global growth recovers. That’s why if you are going to fix – or indeed refix by refinancing – you better get your skates on.

Three of the big four banks – CBA, NAB and Westpac – have started to lift fixed rates in recent weeks: Remember commercial banks will always work ahead of the official rates set by the Reserve Bank of Australia. That’s why a constant focus on the RBA’s mantra that it is not expecting to lift rates for three years can be misleading. Commercial banks can- and will – move rates based on commercial signals rather than waiting for central banks to make their move.

Just now the official line from the RBA is that lift will not rate until 2024. In the market major banks such as ANZ are now pencilling two rate rises for 2023. Look closer at these reports and you will find every bank leaves the issue wide open, suggesting it might all happen fast or slower depending on how things turn out: Bank economists made a major mistake in forecasting a house price drop of 10 to 20 per cent during the Covid crisis. The slump never happened, and they don’t want to be so wrong again.

The key global signal that rates are heading up from here are escalating inflation readings in the USA. The latest US inflation “print” (the annual reading for May released last week) was 5 per cent which followed 4 per cent print a month earlier.

After watching inflation lift for two months in a row, policy makers are now debating whether this post-Covid crisis inflation is transient or something “stickier” that will be with us for years.

Translating this conundrum to the mortgage borrower, the issue is not whether to fix. Rather, the issue is how long to fix for.

For homebuyers – and investors – until recently the risk has been that if you did fix, you might fix too early in the cycle as rates extended an extraordinary decline. Official rates fell from 2010 to 2021 from 4.7 per cent to 0.10 per cent. That era now appears over.

But industry analysts will not spell it out in this fashion. Rather, they phrase it in a way that will cover them should they get their direction or timing wrong. However, most interest rate strategists are willing to use the industry-standard “cyclical bottom” as the phrase of choice for where we are now.

“It’s an opportunity for anyone – homebuyer or investor – and though the rates are just beginning to move up, there are still very good deals throughout the market which we might look back upon and regard as very reasonable in the future,’ Wemyss suggests.

How long should you fix for? It depends on your personal circumstances. The longer you fix the more you are placing faith in higher rates in the future. Advisers say borrowers should primarily fix for lifestyle reasons- such as security in financial planning. They also suggest it is very hard to outsmart the banks on the future direction of mortgage rates. However, we have not seen a period where rates were so low in living memory.

Moreover, it’s not like Australian home buyers have been sitting on the sidelines.

As a percentage of all loans that go out the door at the major banks, fixed rate loans typically sit around 20 per cent of the book though they had faded to near 10 per cent three years ago – more recently they have been getting up to half of all new loans in the market.