Fixed Interest Rates In Focus - Now is the time to FIX - Alluna Finance
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Fixed Interest Rates In Focus – Now is the time to FIX

Fixed Interest Rates In Focus

Fixed Interest Rates In Focus – Now is the time to FIX

Now is the time to fix your home or investment loans

Global interest rates are on the rise. Most notably in the U.S where a series of rate hikes by the Federal Open Market Committee (FOMC) and an end to the bond buying program has seen bond yields to rise to 5 year highs. Chart 1 shows the yield of the benchmark U.S 5 year government bond rate moving significantly above the recent 5 year range.

This shows the recent shift in expectations from low long term interest rates to a view that interest rates will be higher in the future. Rising U.S bond rates place pressure on similar Australian bond rates (Chart 2) to follow despite the Reserve Bank of Australia (RBA) holding official cash rates steady. This is when you will see out of cycle rate hikes on mortgages as international funding rates push lenders to lift variable rates or face a squeeze on their profit margins.

US 5 year benchmark interest rate
Chart 1: U.S benchmark 5 year bond yield breaks higher                         
Source: Bloomberg.com
    Financial instruments like these benchmark bonds are used to price fixed interest rate lending products in Australia.

 

The RBA has started the year as they finished 2017 by leaving official interest rates unchanged at the record low 1.5%. It has been sitting at this rate since August 2016.  With moderate wages growth and inflation below the target 2-3% band the RBA is unlikely to move rates in the first half of 2018. Mortgage rates will be more directly determined by changes in the international funding rates and the expectations of higher rates in the future.

Australian 5 year benchmark interest rate

Chart 2: Australian 5 year benchmark bond yield at top of range               Source: Bloomberg
Financial instruments like these benchmark bonds are used to price fixed interest rate lending products in Australia.

 

There is currently an unusually low spread between variable and fixed rate loans in Australia.

Australian borrowers have the opportunity to switch into a 3 year fixed rate product at or below current variable rate products.  Locking in the historically low rates offers savings and peace of mind. Home owners and investors should ask themselves if fixing rates is a prudent option for their own circumstances for the next few years.

History suggests that we will soon see a return of fixed interest rates being priced at a significant premium to the variable borrowing rate. The long term averages indicate that these fixed rates rise around 0.5% to 0.75% above variable rates.

The table below shows some ranges available from the top twenty or so lenders for the different lending options.

 

 Owner Occupied

Principal & Interest

Owner Occupied

Interest Only

Investment

Principal & Interest

Investment

Interest Only

Variable Rate3.7% – 4.3% *4.1% – 4.6% *3.99% – 4.5% *4.5% – 5.2% *
Fixed 3yr Rate3.9% – 4.4% *4.1% – 4.6% *3.99% – 4.5% *4.5% – 5.0% *

*Based on a $400,000 loan in NSW. Approximate range where multiple high quality lenders are available. Lower or higher rates may apply to your individual circumstances. Interest rate information current as of 05 Feb 2018.

 

Want to learn more about fixed interest rates?  Call Alluna Finance on 0414 678 831 today