RBA Rate Fluctuations: Historical Context.
The Reserve Bank of Australia (RBA) has had a dynamic interest rate journey in recent years. In response to the COVID-19 pandemic, the RBA slashed rates to a historic low of 0.10% to support economic recovery. However, beginning in May 2022, as inflationary pressures intensified, the RBA initiated a series of rate hikes, pushing rates higher to combat inflation. The current cash rate stands at 4.10% as of October 2024.
Historically, rate cuts have been used to stimulate the economy during downturns, while rate hikes are employed to cool inflation during times of economic expansion. Many financial experts predict that with inflation stabilizing and growth slowing, the RBA may pause rate hikes or even begin reducing rates in late 2024 or early 2025. This presents borrowers with a dilemma: should you lock in a lower fixed rate now, or wait for potential rate cuts by opting for a variable rate?
Choosing between a fixed and variable rate mortgage can be a tricky decision. For example, current fixed rates from Macquarie for home loans are 1 year 5.95% and 2- and 3-year terms 5.79% respectively, whilst the variable rate is 6.19%. These figures illustrate a notable gap, with the difference between fixed and variable rates being roughly equivalent to one to two rate cuts. But is locking in a fixed rate the right decision for you? Let’s break down the pros and cons to help guide your choice.
The Pros of Fixed Rates
1. Certainty and Stability: Fixed rates provide predictable repayments, which can be essential for budgeting and financial planning, especially in uncertain economic times or if you have a specific reason, for example reduced income due to maternity leave.
2. Protection Against Rate Hikes: Locking in a fixed rate ensures that you are shielded from potential rate increases during your fixed term, offering peace of mind if the RBA decides to resume hikes.
The Cons of Fixed Rates
1. Missing Out on Rate Cuts: While fixed rates provide certainty, they also limit flexibility. If the RBA starts cutting rates, those with fixed mortgages won’t benefit from lower repayments.
2. Break Costs: Exiting a fixed-rate mortgage early can be expensive. Borrowers who need to refinance or sell their property before the term ends may face high break fees.
The Pros of Variable Rates
1. Potential Savings from Rate Cuts: If the RBA lowers rates in the future, variable-rate borrowers will benefit from reduced repayments, potentially saving money over time.
2. Flexibility: Variable-rate loans often come with features like the ability to make extra repayments, access redraw facilities and access to offset accounts to reduce interest costs, giving borrowers more control.
The Cons of Variable Rates
1. Exposure to Rate Hikes: While variable rates offer the possibility of savings if rates fall, they also come with the risk of rising repayments if the RBA continues to increase rates.
2. Uncertainty: With variable rates, predicting your future repayments becomes difficult, making budgeting more challenging.
What’s the Best Choice for You?
Your decision to opt for a fixed or variable rate will ultimately depend on your financial situation, risk tolerance, and long-term plans. Fixed rates offer security and consistency, which is ideal if you prefer predictability in your mortgage repayments. On the other hand, if you’re willing to take on some uncertainty and believe that rates may drop in the near future, a variable rate might offer more flexibility and potential savings.
The fixed rates mentioned here from Macquarie are provided as an illustration only, but they offer insight into the current lending landscape. At Milestone Lending, we can help you assess your options and find the best rate for your circumstances.
Please do not hesitate to contact me on 02 6176 3110 or 0490 948 059 if you have any questions or would like some further advice.
Written by
Gillian Burns
Mortgage Broker
Certificate IV in Finance and Mortgage Broking
Diploma of Finance and Mortgage Broking Management