Last year, Australia saw some of the lowest home loan rates in history. But, sadly, once you’ve hit rock bottom … the only way left to go is up. And, in recent months, many fixed rates have been creeping higher – despite the Reserve Bank of Australia (RBA) keeping the official cash rate on hold at its record-low of 0.10%. 

What’s going on?

More importantly, is it time to fix your home loan so you don’t get a nasty surprise if and when interest rates rise?

Let’s find out.

The economic recovery is gathering pace

The RBA slashed the cash rate to near-zero to help support Australia’s economy through the pandemic. But not only has our economy proved more resilient than many had predicted – the rebound has been faster and stronger too:

• The RBA now expects the economy to have grown by 5% over 2021 (compared to the 3% it had previously forecast)
• The labour market has recovered strongly, with the unemployment rate falling to 4.2% in December – a 13-year low

Inflation is rising

While that’s great news, it’s also contributed to an inflationary spike during the 2021 calendar year with:

• The cost of living jumping by 3.5%
• Annual ‘trimmed-mean inflation’ increasing to 2.6%

Of these inflation measures, the trimmed-mean version is the one to keep your eye on, for two reasons.

Firstly, it’s the RBA’s preferred measure as it strips out items with volatile price movements, such as food or fuel, to measure the underlying inflation in the economy.

Secondly, the RBA’s governor has repeatedly gone on the record to say the bank will not increase the cash rate until actual inflation is “sustainably” within the 2-3% target range.

For that to happen, the bank believes annual wages growth will need to rise to at least 3% (it’s currently 2.2%) – something the RBA believes will not happen until late 2023.

But some of the big four banks disagree:

• Westpac has pencilled in a hike in August 2022, followed by a further hike in October
• Both NAB and CBA think it will happen in November 2022

As such, these lenders – and many others – have already started increasing their fixed rates. And it’s likely the trend will continue given the speculation

This leads us to the obvious question: is now the time to fix?

The pros and cons of fixing your home loan

A fixed-rate home loan lets you lock in an interest rate for a set timeframe – typically between one and five years. This:

• Protects you should rates subsequently rise
• Helps with budgeting as your monthly repayments stay the same during the fixed period

That said, fixed-rate home loans can be inflexible. For example, you may:

• Be limited to the number of extra repayments you can make without penalty
• Have to pay break fees if you want to refinance during the fixed period

What’s more, fixed-rate home loans typically don’t come with features such as offset accounts and redraw facilities that can save you money in the long term.

Should you fix your home loan?

As every borrower is different, there isn’t one answer. That’s why it can be a good idea to speak to an expert broker like Just Imagine Finance. We can help you weigh up the pros and cons, so you can decide whether a fixed-rate loan is right for you.

Get a free consultation with Just Imagine Finance to find out if fixing is the right move for you by emailing catherine@justimaginefinance.com.au or calling 0414 673 359.