Leading in to 2023 – ‘Beware of Maturing Fixed Rate Loans’
I’m going to briefly take the ‘time machine’ back to 2019. Interest rates were falling and the then coalition Government were concerned about economic growth. To support the home lending market and ensure growth in the construction industry was maintained, there was a telling move made by the banking regulator APRA. It removed the ‘floor’ for home loan servicing assessment rates. At the time of that removal the minimum floor assessment rate was 7%. Interest rates were falling and perhaps the Government and APRA felt there was no concern about rates rising anytime soon? Money was awash throughout the world economies in an attempt to stimulate and support economic growth. This was keeping interest rates low as supply of money was ready, so its cost was low. The significance of this was that it allowed lenders to lend higher volumes to borrowers. It eased the borrowing capacity assessment. Banks still had a ‘stress buffer’ percentage which they added to the actual interest rate being charged to their customers but instead of using the 7% ‘floor rate’ (now removed) they could simply add their stress buffer of say 2% to 2.50%. In the lenders’ defence, they also internally placed a minimum ‘floor rate’ which was around 5%. That was not policed by APRA . That then meant when they were assessing borrowing capacity , it was assessed at say 5% ‘worse case’ instead of the previous APRA floor at 7%. That 2% reduction meant a borrower was able to stretch their budget and end up with much higher debt levels . Notwithstanding, a further safety measure was taken by the borrowers and lenders in collaboration . They opted to take a ‘fixed rate’ loan for 1-5 years . Australian lenders don’t generally offer fixed rates for longer periods . So now all was fine. Or was it?
I’m back in the time machine and a little older and wiser being back in 2022, heading in to 2023. Many of our borrowers, now sitting on debt of well in excess of $500000 are about to see their 3-4 year fixed rates mature with their lender. Back in 2019 they borrowed the $500000 over a 30 year loan term, fixed the rate at 2%, and repayments were $1850 per month. The bank is now offering them a variable rate of 5% and suddenly loan repayments are now $2815 per month. Yes that’s right, they have increased by $965 per month ☹. The other option of taking another fixed rate does not at this point offer great relief as the fixed rates are reflecting a similar position to that 5% or in some cases more.
Despite the above it’s not all doom and gloom. If the external economic indicators are correct and we see a difficult 2023 economic climate, we may also see interest rates reach a peak in their current upward cycle and subsequently variable rates may decline a little , to see home loan rates settle back on or perhaps just under 5%. There is also evidence of fixed rates starting to come back, which means lenders are also thinking that economic growth will slow through 2023. Therefore with some good negotiation , plus close expert advice from your broker, you may be able to minimise pain coming off that current low fixed rate. Make sure you keep in close contact with your broker.
Contact Michael on 65832211 to discuss the above or any aspect about your home loan.
Merry Christmas 😊