Jumping from fixed rates too early risks leaving money on the mortgage table

House prices are expected to lift more than 20 per cent this calendar year and another 5 to 7 per cent in 2022. Picture: NCA NewsWire/John Gass

Home loans borrowers risk leaving money on the table in the mortgage market as house prices and interest rates look set to rise in the months ahead.

With National Australia Bank forecasting that borrowing capacity could be reduced by up to 20 per cent even on current cash rate expectations, owner-occupiers and investors appear to be cooling on “fixing” their home loan rate.

The fixed rate share of home loans has slipped in recent months moving down from around 47 per cent to 45.3 per cent at the end of September.

Similarly, the value of refinancing to new lenders declined by around 9 per cent over the month of September — the first fall in more than six months.

Steve Mickenbecker, group executive financial services at Canstar says: “Fixed rates for terms beyond one year are already increasing — borrowers should be anticipating the end of falling rates and looking to get ahead while the going is good.”

The major banks have been quietly lifting fixed loan rates — especially over longer terms such as three to five years — in recent weeks.

“There will be more increases coming. We will see the fixed rates lifting over the next year long before we see any rises in official rates which are getting all the attention at the moment,” says Mickenbecker.

Long-term fixed rates are still available at very low rates on a historical basis, with many close to 3 per cent. However, the major banks have been promoting some cuts to basic variable rates, which can be below 2.5 per cent, while putting through fixed rate increases.

Variable mortgage rates — which move in line with RBA changes — have traditionally dominated the Australian market and are typically lower than fixed rates.

Money markets are pricing in the first official cash rate hike in May next year. Picture: NCA NewsWire/Joel Carrett

Fixed rates appeal to homeowners or investors who wish to know their repayments well in advance — but over the last year the fixed rates have had an extra appeal as a four-decade decline in rates and bond yields appeared to bottom out. Fixed-rate mortgage volumes have tripled in recent times. Banks will have better margins if home loan borrowers fail to optimise low fixed rates and later all rates move higher.

Modelling from the Canstar group suggests that even a modest lift in official cash rates — which are under increased pressure from bond market traders this week — will kick up borrowing costs substantially. The comparison service suggests an average home loan borrower currently on a 3.09 per cent (principal and interest package) faced with an increase in the official cash rate to 1 per cent (from 0.10 per cent currently) would have to pay an extra $561 a month on a million dollar mortgage.

The latest housing figures — for the month of September — show a very mixed market, with a drop in total lending commitments, which is now expected to rebound with the ending of lockdowns in the nation’s two biggest markets, Sydney and Melbourne.

As auction rates across the nation saw their second busiest weekend of the year, economists widely expect house prices to continue edging higher in the months ahead, with a possible plateau in mid-2022. House prices are expected to lift more than 20 per cent this calendar year and another 5 to 7 per cent in 2022.

Meanwhile, the money markets are pricing in the first official cash rate hike in May next year.

The latest housing report also confirmed the return of investors in the market, which has in turn pushed the volume of first home buyers lower. Investors now represent nearly one in three of all new home loans (32 per cent).