Over the past few weeks, we’ve noticed an interesting trend in the mortgage market: some lenders are increasing their fixed home loan rates.
This often catches borrowers by surprise, especially when there is ongoing discussion about the direction of interest rates and the possibility of future cash rate cuts.
After all, if the cash rate is expected to come down, why would a bank increase the rate on a fixed home loan?
The answer is that fixed mortgage rates don’t move in lockstep with the Reserve Bank of Australia’s (RBA) cash rate. Banks consider a range of market factors when setting fixed rates, including the cost of wholesale funding and where they expect interest rates to move in the future.
For borrowers, this is an important reminder that choosing a home loan isn’t simply about chasing the lowest advertised interest rate. The right loan structure, features and level of flexibility can all make a difference over the life of a mortgage.
So, what’s driving the recent movement in fixed rates, and what could it mean for homeowners and investors?
Fixed rates don’t always follow the cash rate
Many people assume fixed rates move in line with the Reserve Bank cash rate. In reality, fixed rates are heavily influenced by the broader financial markets, rather than being directly tied to the cash rate. Some of the factors lenders consider include:
- Wholesale funding costs
- Bond market movements
- Future interest rate expectations
- Competition among lenders
When you fix your mortgage, the lender is effectively taking on some of the risk that interest rates could move during your fixed term. As a result, lenders look at the cost of funding money over that period when determining the fixed rate they offer.
Banks are continually assessing these factors when pricing their fixed-rate products. This means a change to a lender’s fixed rates doesn’t necessarily mean the RBA is about to increase or decrease the cash rate.
For borrowers, understanding this distinction can make it easier to make sense of changes in the mortgage market and avoid assuming that fixed and variable rates will always move together.
What this could mean
When lenders begin increasing fixed rates, it can sometimes indicate that funding costs remain elevated or that lenders are adjusting their pricing strategies in response to changing market conditions. While no one has a crystal ball, these movements can provide insight into what changes lenders are anticipating in the market.
However, it’s important not to treat movements in fixed mortgage rates as a guaranteed forecast of where interest rates are heading.
Banks are making their own pricing decisions based on their funding costs, expectations and commercial considerations. One lender increasing its fixed rates doesn’t necessarily mean interest rates are about to rise across the board.
Is a fixed rate right for you?
There is no one-size-fits-all answer when it comes to choosing between a fixed and variable home loan.
A fixed-rate loan may suit borrowers who:
- Want certainty around repayments
- Are concerned about future rate increases
- Prefer stability when budgeting
The trade-off is that fixed loans can provide less flexibility. Depending on the lender and loan product, there may be restrictions around making additional repayments, accessing an offset account or refinancing during the fixed period.
A variable-rate loan may appeal to borrowers who:
- Want flexibility
- Believe rates may reduce in the future
- Want access to features such as offset accounts and additional repayments
Variable rates can provide more flexibility, but repayments can also increase if interest rates rise.
In many cases, a split loan combining both fixed and variable portions may also be worth considering. This approach can provide some repayment certainty while retaining flexibility on part of the loan. Ultimately, the most suitable structure depends on your circumstances, financial goals, appetite for repayment changes and how long you expect to hold the loan.
Don’t assume your existing loan is competitive
The property and lending landscape changes quickly. A home loan that was competitive when you first took it out may not necessarily remain competitive several years later.
Whether you’re an owner-occupier or investor, it’s worth reviewing your loan regularly to ensure:
- You’re not paying more than necessary
- Your loan structure still suits your goals
- You’re making the most of available features
- You’re positioned well for future opportunities
A mortgage review isn’t necessarily about refinancing. Sometimes the right outcome may be to stay with your existing lender, particularly if they can offer a competitive rate or suitable product.
The important thing is to understand what options are available to you.
What this means for homeowners
For homeowners, investors, and anyone looking to buy property, now is the perfect time to keep an eye on your lending arrangements.
Even a small increase in interest rates can affect monthly repayments. A simple review could potentially save thousands of dollars over the life of your loan. Additionally, loan features, fees, flexibility and your intended loan structure can all influence the overall value of a home loan.
This is particularly relevant if you haven’t reviewed your mortgage for 12 months or more, or if your circumstances have changed since.
A simple loan health check can help you understand whether your current mortgage remains competitive and whether there are other options worth considering.
Find out more about what homeowners need to know and what you should be doing now.
Need a loan health check?
If it has been more than 12 months since your last review, or your financial circumstances or goals have changed, now could be the perfect time for a conversation.
At Venro, we regularly review our clients’ lending arrangements to ensure they remain competitive and aligned with their financial goals. Contact the Venro team today.