Lenders are raising long-term fixed interest rates

By Kate Forbes | 31 May 2021

Property buyers are facing rising mortgage costs with Commonwealth Bank (CBA) being the latest lender to hike its long-term fixed-interest rates.

And there could be more home loan interest rate rises to come.

Further hikes expected later this year suggest we could see a tide turning on Australia’s interest rates.

While the Reserve Bank is not expected to lift interest rates until 2024, costs for longer fixed-term loans are already on the rise – with only a handful of lenders still offering the ultra-low rates reached last year.

Just last week, CBA upped their fixed-term rates of owner occupiers but spared investors from the rate increase.

The rate rises of between 0.05% and 0.1% apply to both the bank’s owner-occupied principal and interest three- and four-year fixed rates and its interest-only three- and five-year fixed rate mortgages.

These are the new rates, for borrowers with at least a 5% deposit (up to a 95% loan-to-value ratio (LVR)):

New package rates

  • Three-year fixed rate, principal and interest repayments (P&I): increased by 0.05 percentage points to 2.19% (3.85% comparison rate)
  • Four-year fixed, P&I: increased by 0.05 percentage points to 2.24% (3.74% comparison rate)
  • Three-year fixed, interest-only (IO): increased by 0.10 percentage points to 3.49% (4.15% comparison rate)
  • Five-year fixed, IO: increased by 0.10 percentage points to 3.89% (4.24% comparison rate).

New standard rates

  • Three-year fixed, P&I: increased by 0.05 percentage points to 2.34% (4.12% comparison rate)
  • Four-year fixed, P&I: increased by 0.05 percentage points to 2.39% (3.97% comparison rate)
  • Three-year fixed, IO: increased by 0.10 percentage points to 3.64% (4.45% comparison rate)
  • Five-year fixed, IO: increased by 0.10 percentage points to 4.04% (4.48% comparison rate).

Rate increases are part of a border trend

CBA’s move to hike fixed interest rates is part of a broader trend of increasing fixed rates and follows recent increases by National Australia Bank (NAB) and Westpac Bank, leaving only ANZ to follow suit.

In fact, recent Canstar research shows that 38% of lenders on its database have now increased at least one fixed rate in the past two months.

NAB and Macquarie hiked their four- and five-year fixed mortgage rates earlier in May, by 0.25% and 0.30% respectively for owner-occupier loans with principal and interest repayments.

Meanwhile, Westpac increase the interest rates on two of its ‘Premier Advantage Fixed Options’ home loans by 30 basis points in late-April, taking the new interest rates on these loans to 2.29% p.a for the 4-yrs loan (3.38% p.a comparison rate) and 2.59% p.a for the 5-yrs loan (3.43% p.a. comparison rate).

ANZ is now the only ‘big four’ bank not to have increased its rates on fixed-rate loans.

Four-year fixed term rates across the big four banks are now all back above 2%, with NAB lifting its rate last week, following similar moves by Westpac and NAB earlier this year.

ANZ’s rate never fell below 2%.

Sign of a sea-change?

Only three lenders are now offering four-year rates below 2%, down from 25 at the start of the year, and they’re unlikely to stay at such levels for long, Sally Tindall, research director at RateCity.com.au told Domain.

Thirty-one lenders have now hiked at least one four-year fixed rate in the last two months.

“Banks are shutting the door on record low four and five-year rates. Three-year rates are likely to be next, potentially in the second half of this year,” she said.

Experts warned back in March that competitive fixed rates had probably reached their lowest point.

At the time, borrowers were warned that bank funding costs would rise after Australia’s $200 billion emergency Reserve Bank funding scheme, put in place to mitigate the impact of the coronavirus crisis, ends on 30th June this year.

That program, which enabled ‘cheap’ three-year funding to lenders to reduce their costs, also in turn reduced interest rates for borrowers.

The end of the program is expected to lift fixed mortgage rates from ultra low levels and also dampen soaring demand for housing.

Tindall said the recent rises were the “canary in the coal mine” for borrowers, showing banks had already started to factor in future  funding cost rises and interest rate hikes.

And the shift shows that owner-occupiers taking out new mortgages need to be wary that their costs would likely significantly increase in future.

Borrowers needed to make sure they would be comfortable with increased repayments in future, particularly those who are already stretching themselves thin trying to keep up with rapidly rising property prices.

At the same time, property investors need to remember they aren’t immune.

While their investment loans are not currently affected by the rate increases, they will move higher eventually.

Australia’s property markets are still hot

Despite the rises, home buyers and investors haven’t slowed down their spending, with recent data showing that the property market is as hot as ever.

CoreLogic reported a preliminary clearance rate of 78.2% across 2,845 homes over the weekend as home buyers and property investors squared off at auctions across the country, maintaining a string of 15 weeks above 77 per cent.

By comparison, 2,905 homes were taken to auction the previous week, with a 79% clearance rate.

The results are far higher than data collected the same time last year which showed that a mere 612 homes were taken to auction across the combined capital cities.

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Kate Forbes is a National Director at Metropole Property Strategists. She has  over 20 years of investment experience in financial markets in two continents, is qualified in multiple disciplines and is also a Chartered Financial Analyst (CFA).
She is a regular commentator for Michael Yardney’s Property Update    
 


Read more Expert Advice from Kate here!

Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.

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