Banks raise fixed rates as RBA hike speculation grows

A growing list of lenders are hiking three-year fixed home loan rates despite the fact the Reserve Bank has kept the cash rate on hold today.

The tide is also starting to turn for two-year fixed rates, with more lenders hiking than cutting in the last month.

This trend is expected to continue now the RBA’s term funding facility has finished. There is also growing speculation the next cash rate hike could come as early as late 2022.

Analysis of the RateCity.com.au database shows in the last month 19 lenders have increased at least one three-year fixed rate, including Westpac and NAB, and 17 lenders have increased at least one two-year fixed rate.

Lenders who have changed at least one rate over the last month

 Source: RateCity.com.au. Note: A number of lenders have changed multiple home loan rates.

RateCity.com.au research director, Sally Tindall, said fixed rates were likely to keep rising now the RBA’s term funding facility had wrapped up.

“The RBA’s term funding facility was helping banks put sub-2 per cent rates on the table. We expect more rates will rise now this ultra-low funding source has closed,” she said.

“There are still 38 three-year fixed rates under 2 per cent but these aren’t likely to hang around. In a matter of months, they could be extinct.

“That said, there are still 189 home loans under 2 per cent. They’re not all going to disappear overnight,” she said.

Early cash rate rise a possibility

Ms Tindall said while there was a chance the low-rate honeymoon could be cut short by the RBA, it was unlikely to happen any time soon.

“The Board hasn’t ruled out the possibility the next cash rate hike might come sooner than expected. Governor Lowe said it is unlikely to be before 2024 but in saying that, he’s left the door open to it happening earlier,” she said.

"The RBA has made it clear, any decision to lift the cash rate is not dictated by the calendar, but rather the progress our economy makes. Despite the current wave of lockdowns, so far that progress has been remarkable.

“If the RBA does decide to hike the cash rate before 2024 it won’t be a rush job. The central bank will give mortgage holders plenty of notice. The last thing the country needs is people defaulting on their home loans,” she said.

Fixed rate ticking time bomb

Australians have been enjoying home loan rates under 2 per cent for just over a year now. Despite the hikes, there are still 189 rates under 2 per cent, the majority of which are fixed rates.

However, when these fixed rates come to an end, the landscape is likely to be noticeably different.

For example, if the average mortgage holder with a $500,000 loan fixed with a big four bank for two years at 1.94 per cent, at the end of the fixed term they would be faced with an average revert rate of 3.43 per cent, which would see their monthly repayments rise by $368. This revert rate could be higher if variable rates rise before July 2023.

Even if the person renegotiated or re-fixed their mortgage, they are likely to be offered significantly higher interest rates.

Note: based on a $500K, 30-year owner-occupier loan paying principal and interest. Assumes revert rate remains the same.

How can borrowers prepare for rising rates?

• Don’t bite off more than you can chew: The banks stress test your loan but make sure you do the same. Check you’re comfortable paying the mortgage if rates rise at least 2.5 per cent, even more if you are on a fixed rate.
• Make extra repayments: Every extra dollar you put in your loan now is a dollar less you will have to pay interest on when rates do rise. If you are on a fixed rate and exceed the extra repayments cap, consider setting the money aside in a saving account so you’re ready for when you come off your fixed term.
• Set a reminder to refinance: If you are on a fixed-rate loan, diarise the end date and shop around for a better deal when it comes to an end. If you’re on a variable rate, give your home loan a health check at least once a year.

Lowest rates on the RateCity.com.au database

Note: Rates are for owner-occupiers paying principal and interest. Some LVR requirements apply.

Lowest big four bank owner-occupier home loan rates

Note: Westpac's rates are for a loan to value ratio of up to 70%.

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