The fear of missing out or FOMO has been one of the biggest drivers of the leaking real estate market in Australia.
And this is also becoming all too real in the loan market, as a rush of new buyers and a wave of refinancing collides with the reality that longer term loans are now starting to get more expensive.
Many of the big banks have quietly dropped their very low four-year fixed rate offerings, leaving buyers and refinancers the choice to pay more or take the risk with shorter fixed loan terms.
Potential downstream accessibility crisis after fixed loan maturity
This dose of reality has also highlighted a potential crisis in loan affordability when the current band of fixed-term loans expires and looks set to be replaced by floating or higher fixed rates.
While the Reserve Bank has been absolutely stoic in its assertion that it has no intention of raising official interest rates above their current 0.1% until 2024, actual rates in the market measured by 10-year bonds and money market rates have risen, taking into account an ongoing economic recovery, potential inflation and higher rates.
Banks plan at least one official rate hike in 2024
Additionally, many banks are planning at least one rate hike in 2024, which they incorporate into their four-year fixed pricing.
10 lenders, including some of the majors, have raised their rates to four years in the past month, while at the same time the rates on two and three year fixed loans have been declining.
There is no doubt that the historically low rates on offer have played a role in the galloping real estate market and there is no shortage of bullish forecasts for the market, with UBS recently raising its forecast for this year from a 10% rise to 15%. . %.
Predictions should be treated with caution
It should be remembered, however, that the future is inherently unknowable and that not so long ago some of the big banks were forecasting drastic real estate market drops of up to 20% as the pandemic broke out. and that unemployment was rising sharply.
One thing that has changed with today’s low rates is the popularity of fixed rate loans, which traditionally accounted for around 10-15% of loans taken out. visit the site here to learn more about paydaychampion
This has risen dramatically as FOMO and a large gap between fixed loans and more expensive floating loans saw the value of monthly fixed rate loans soar, reaching $ 15.7 billion in February.
If you can’t beat them, join them
Some of these will be current loan customers who will reduce their home loan bills by refinancing with fixed rates, but ANZ Economics believes that fixed rate loans now account for around 40% of new loans underwritten.
This has the potential to make this real estate boom different from many that came before it, as even a rise in interest rates could leave a large number of borrowers unchanged as they assume their fixed loans.
However, while the pain was felt early by homeowners when the traditional variable rate loan increased with the general interest rate, this time around the effect will be more dispersed as a variety of fixed loans mature. after two, three, four and five years. expire.
Beware of the loyalty tax
One thing that hasn’t changed for this refinancing boom is that existing borrowers who aren’t careful about the rate they’re paying tend to pay a hefty “loyalty tax”.
At the very least, it’s worth checking out what your current lender is offering new customers and drawing attention to the fact that as a loyal customer, you expect to be treated at least as favorably.
If that doesn’t work, there is always the option of joining the rash of refinancing for fixed or variable loans, with the usual caveat of checking out the extent of fees and charges that are required to change.