Some interesting things are happening to interest rates.
On the one hand more economists are suggesting another rate drop or tow next year and on the other a growing number of institutions are increasing the interest rates on their fixed home loans suggesting where they think the market might be heading.
OECD say rates should remain low.
Recently the Organisation for Economic Cooperation and Development (OECD) recommended that it’s important the Reserve Bank of Australia (RBA) keeps interest rates low, particularly in the absence of inflation pressures.
In its latest economic outlook released in Paris on Tuesday, the OECD said it expected the Australian economy to grow at a sub-trend pace of 2.5 per cent and 2.6 per cent in 2013 and 2014, respectively. The Paris-based institution said:
“The economy is still in a transition phase. Mining investment has slowed, fewer jobs are being created in this sector, and the terms of trade have deteriorated, thereby damping domestic demand.”
With lower economic growth and some speed bumps ahead of us, Bill Evans chief economist of Westpac now predicts a further 2 rates cuts over 2014.
On the other hand fixed rates are rising.
About half of all 4- and 5-year fixed rate home loans, and more than a third of 3-year fixed rate home loans, have had rates adjusted up in the past two months, according to Australia’s leading financial comparison website, RateCity
RateCity data shows 188 fixed rate products have had rate hikes since early September, including 88 in the past fortnight, by a maximum of 0.55 percentage points.[sam id=31 codes=’true’]
Alex Parsons, CEO of RateCity.com.au, said longer term fixed rates are on the way up.
“Movements in fixed rates are common and based on a number of variables, but the trend is definitely to longer term rates drifting up,”
By comparison shorter term fixed rates remained largely unchanged, or even fell slightly in recent weeks, with 1-year fixed rates as low as 4.29 percent.
“We have seen a lot of competition in the shorter term fixed rates. While they are also subject to the same market forces as longer terms, they’re a lower risk way for institutions to offer hot rates to attract new customers,” he said.
Fixing can be an attractive option for borrowers because it offers repayment security, making it easier to budget. But they aren’t as flexible, which can be a drawback for some, and some lenders make it harder to make extra repayments as a way of building a repayment buffer. And others charge big fees for exiting the loan before the end of the fixed term.
Another key area to watch out for is the interest rate to which fixed loans revert once the set period is over, said Parsons.
“Most fixed rates revert to a variable rate option at the end of the fixed period, which depending on the rate cycle, could be more than 1 percentage point higher and can mean having to fork out thousands of dollars more per year to service the same loan,” he said.
“Borrowers should prepare for the eventuality of higher interest rates in the future and make sure they could comfortably afford to service the loan if rates increased to the historical average of around 7 percent or even higher.”
For example, a 0.25 percentage point rate rise would increase the first 12 months’ repayments by $540 (or $45 per month) for a borrower with a $300,000 home loan and paying the basic variable rate of 5.19 percent.
But if rates were to return to their historical average of 7 percent, the same borrower would have to find an extra $333 a month, or $3996 a year.
“If borrowers aren’t sure whether they want to fix or not, they do have the option of splitting their loan between fixed and variable – so they have the best of both worlds.”