Fixed Rates Take a Sharp Turn

Sometimes it starts with just a few raindrops.

Recent Changes to Interest Rates for Investors

Lender Variable Rate
3 Year Fixed
Rate Change
5 Year Fixed
Rate Change
ING DIRECT - + 30 +35
ME Bank + 10 + 15 -
Suncorp Bank - + 15 - 40
Westpac - + 30 + 60

On Tuesday this week we received a notice from small Industry Super Fund owned ME Bank that it was raising its variable interest rates by between 5 and 10 bps (0.05 to 0.1%pa).  I thought little about it at the time.  Perhaps they were adjusting rates slightly to attenuate their market positioning.  This kind of adjustment is relatively frequent across the lenders.

Source:  Loanscape

Then on Wednesday we heard that CBA was lowering its term deposit rates – those rates that they kept high when justifying why they had not passed on the full RBA rate cut back in August.

On Thursday we found ourselves scrambling to get a client's fixed rate loan application into ING DIRECT – they had just announced BIG increases to their fixed rates across a range of terms – to apply from Friday 25th November.

Then yesterday a similar announcement from Westpac – 3 days notice of big increases to fixed interest rates.

Four days, four announcements – something is happening.  The raindrops have become steady rain and may be the portents of a deluge.

According to Clancy Yeates of the Sydney Morning Herald the victory of Donald Trump in the US presidential election has precipitated a sharp rise in US bond yields.  Investors have bid up the bond rate in response to speculation that we are heading for a new burst of inflation caused by Trump’s proposals to lower taxes and go on an infrastructure spending spree.

The yield on 10-year US government bonds hit a 2016 high this week, and this is having reverberations around the financial world, including in markets that determine the price of fixed-rate home loans. 

A key benchmark used by banks when pricing fixed-rate loans, three-year swap rates, have lifted by about 20 basis points to more than 2 per cent in the 2 weeks since Trump’s election

So what does this mean for Australian borrowers?  Well if you are thinking about fixing your home loan, right now may be a good time to do it – unless your lender has already moved. 

For those choosing to stay on a variable rate the future is less clear.  Fixed rates are most often a leading indicator of the future direction of variable rates.  So we may be seeing indications that we are at the bottom of the cycle.  On the other hand economists are still forecasting a tough period for the Australian economy in the short term as the housing construction boom winds down and businesses continue to hold back from new investment.  This means that our central bank is still inclined to keep rates low while encouraging the government to look for other triggers to kick start the economy.

If you are looking to fix your loan keep in mind the following:

  • A fixed rate loan contract is essentially an agreement to pay a pre-agreed (minimum) amount of interest during the fixed rate term.  In return for providing certainty in the loan repayments lenders generally permit only very limited additional repayments to their fixed rate loans, which cannot be redrawn if you later require access to the funds repaid.
  • Fixed rates are not suitable where you may be considering to sell your property during the fixed rate period.  Such a decision would likely require the repayment of the fixed rate loan and trigger break costs which can be thousands of dollars.
  • At the completion of the fixed rate term many lenders (particularly the major banks) will seek either to lock the borrower into a further fixed rate term, or return the loan to a variable rate with a lower level of discount than could have been negotiated at the time the loan was established.  

Disclaimer: This article is intended to provide general news and information only.  While every care has been taken to ensure the accuracy of the information it contains, neither Loanscape nor its employees can be held liable for any inaccuracies, errors or omission.  All information is current as at publication release and the publisher takes no responsibility for any factors that may change thereafter.  Readers are advised to contact their financial adviser, broker or accountant before making any investment decisions and should not rely on this article as a substitute for professional advice.