Interest rates have increased significantly in the past few months and aren’t tipped to slow down anytime soon. They sat at a record low 0.1% for more than a year to protect Australia’s economy through the pandemic.
As a result of record low rates and record stimulus spending, inflation is creeping up: it currently sits at 6.1% (June quarter) and is tipped to get as high as 8% by next year. The Reserve Bank is using interest rates in an attempt to curb spending and to reduce the heat in the economy.
The ASX 30 day interbank cash rate futures may provide some insights into what Australia’s economic future may look like. Since April, we have moved from a cash rate of 0.1% to a current rate of 1.85 (June quarter), with markets predicting we will see an increase to 3.75% next year.
With an average mortgage at $600,000, this will equate to an additional $1825 in interest costs every month – definitely not an insignificant amount of money!
I still look fondly at a transaction I wrote in mid 2021, where I fixed a client’s rate at 1.99% for four years. (Alas, those days could be gone forever.) Today the equivalent loan costs in the vicinity of 6.2%. At such wildly increased fixed rates, we are commonly asked if a fixed rate loan now offers any value.
The borrower market is constantly assessing the value differential between fixed and variable rates.
Fixed loans surged in popularity through the pandemic as borrowers sought certainty in an uncertain world. Nearly 50% of all loans written in July 2021 were fixed, up from around 15% in March 2020.
This story is from the September 2022 edition of Money Magazine Australia.
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This story is from the September 2022 edition of Money Magazine Australia.
Start your 7-day Magzter GOLD free trial to access thousands of curated premium stories, and 8,500+ magazines and newspapers.
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