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Last year saw Australian borrowers get to enjoy some of the lowest fixed home loan rates in history, but that’s slowly beginning to change as fixed rates trickle back up.
This is largely due to two things: The Reserve Bank dropping its 2024 guidance on increasing the cash rate, and APRA bumping its serviceability buffer from 2.5% to 3.0%.
As a result, banks and lenders have reacted by bumping up interest rates largely on their fixed offerings, with variable rates remaining largely untouched or cut.
If the current trend continues, variable-rate loans will become cheaper than fixed-rate loans.
This is significant because fixed mortgage rates have been tracking sharply below variable rates throughout the pandemic, leading many borrowers to lock in their rates. But now that the interest rate cycle is beginning to turn, investors who haven’t already fixed their rate could face a sharp reduction in their free cash flow.
Even a small increase in interest rates can be significant as interest rates are starting from such a low base.
What should investors do?
Even with fixed rates rising, investors should make sure a fixed rate is right for them. Lenders may restrict additional repayments on fixed loans or charge break costs if there is a change in your circumstances, such as selling the property or switching lenders.
If you plan on accessing the equity in your property to build wealth in the near future, locking yourself into a fixed rate may prohibit you from doing this, unless you pay an exorbitant break fee.
With that said, fixed rates have a lot going for them. The main benefit of a fixed rate is the certainty it provides. A fixed-rate means your interest rate is locked in for a period of time, typically anywhere from one to five years. This means your repayments are also locked in, protecting you from potential interest rate rises.
Having your repayments locked in means you have cash flow certainty and can budget accordingly for the period you’ve fixed. However, the cash flow impact of an interest rate rise on your primary place of residence (PPOR) loan will be more significant than on your investment loan because of the tax deduction you receive for investment debt.
For example, if the interest rate on your $600k home loan were to increase by 1%, the cash flow impact is $6,000 p.a.
However, if your $600k investment loan rate also increases by 1%, the cash flow impact after-tax is $4,000 (after your tax deduction).
As investors generally have more capacity to weather an interest rate rise on their investment loan, it may be wise to consider fixing the rate on your home loan for your PPOR first.
At loans.com.au we offer a Smart Booster Investor Bundle which allows you to bundle your home loan with your investment loan. You also have the option to split this loan with one of our low-rate fixed loans.
If you already have a variable rate mortgage and are worried about your ability to make repayments should rates rise but still want the flexibility of a variable loan, you may want to consider fixing part of your interest rate (a split loan) sooner rather than later.
The bottom line is that if you’re worried about interest rate rises and the impact it will have on your cash flow, you should do your homework now to protect yourself.
The good news is that right now, lenders are offering some excellent fixed interest rates.
At loans.com.au, we offer competitive fixed rates. View our home loan fixed rates.
Marie Mortimer is Managing Director of loans.com.au, one of Australia's largest online lenders. Since Marie started the business 10 years ago, Marie has grown loans.com.au into a company with $6 billion worth of home and car loans. Marie is dedicated to improving financial literacy for all Australians and is passionate about the FinTech industry in Australia. When she isn't at work, she loves to spend time with her husband and two young children.
loans.com.au is an online lender for home and car loans. For 10 years, Aussies have trusted the locally based loans.com.au team to support them with low home loan and car loan rates, approved quickly through the online loans.com.au app.