Interest rates mortgage gamble: do you fix now or wait it out?

Mortgage interest rates are rising fast, tempting worried borrowers to fix. Here’s how to work out if that’s your best option.

Nervous borrowers worried about more super-sized interest rate rises face a painful dilemma about what to do with their mortgage.

Tuesday’s Reserve Bank rate increase of 0.5 percentage points to 0.85 per cent is the biggest single jump in 22 years and will lift average variable mortgage variable rates well above 3 per cent.

However, banks already pushed most of their fixed rates above 4 per cent, with many four and five-year fixed rates now above 5 per cent.

Fixed-rate mortgages deliver certainty of repayments, but there is no certainty that RBA rate rises will push variable rates to 5 per cent any time soon. And if people lock into a fixed loan, they can face break costs if they try to exit it early.

Banks have begun responding with their own 0.5 percentage point variable rate rises, with Westpac moving first on Tuesday, followed by CBA then NAB and ANZ on Wednesday.

RateCity research director Sally Tindall said the lowest current variable rate was 1.94 per cent – from online lender Reduce Home Loans – but sub-2 per cent rates would now disappear. Major banks offered variable rates below 2.5 per cent to new customers, but the average variable rate among all borrowers was already above 3 per cent, she said.

And getting a clear idea of how high the official RBA cash rate will go is almost impossible. RBA governor Phillip Lowe has mentioned 2.5 per cent, but big bank forecasts range from 1.6 per cent to 3 per cent.

“No one knows what will happen with any certainty – it’s always a gamble,” Ms Tindall said.

She said people should consider the impact of future rate rises on their household budget, and the impact of rising variable rates on their stress levels, before deciding whether or not to fix.

“War-game what your mortgage will look like if the cash rate goes to 1.75 per cent by Christmas or 2.75 per cent by Christmas next year,” Ms Tindall said.

“If it doesn’t fit your budget, take steps now.

“Banks still need to keep new business rolling through the door, and they’re typically doing it by offering sharper discounts to refinancers willing to switch lenders,” she said.

Oracle Lending Solutions managing director Angelo Benedetti said most of the clients who had contacted him about rising rates were choosing to remain on variable rates, but it was a case-by-case decision.

“You have to understand that the banks already factored in rate rises in their fixed rates, and there’s about a 2.2 per cent buffer,” he said.

“If they go up 1.6 per cent you are still better off on a variable rate.”

Comparison website Mozo.com.au’s spokesman, Tom Godfrey, said it had found some lenders offering variable rates 1 per cent below the average.

“Even with home loan rates steadily increasing, it pays to compare and make sure you’re getting the best deal possible,” he said.

Mr Godfrey said people should stress test their ability to make higher repayments, using free online calculators, try to negotiate a better deal with their existing lender or switch providers, and set up an offset account to reduce interest payments.