The interest rate crystal ball: Managing your mortgage rate?

By Jesse McPherson

Right now, after the escalating price of groceries, the biggest issue on everyone’s mind is interest rates. Whether you’re a homeowner or a prospective buyer you’ll want to effectively manage the dynamics of interest rates because of the impact it has on your financial position and let’s face it – your life.

I’m going to delve into the current state of interest rates, the perennial debate between fixed and variable rates, and some strategic tips for managing your mortgage rate in these uncertain times.

Interest Rates: The Crystal Ball Dilemma

Interest rates are like the weather; everyone talks about them, but no one can predict them with absolute certainty. Right now, we’re in a period where the major banks have differing opinions on whether rates will rise or fall. This uncertainty can make it tempting to sit on your heels and wait for a clearer picture. However, inaction can sometimes be more detrimental than making a move based on the best information available.

Banks often signal their expectations through their fixed rates, particularly at the three to four-year level. If you see banks keeping these rates steady or raising them, it’s a fair indication that they expect rates to be higher for longer. For instance, the Commonwealth Bank of Australia (CBA) has been vocal about expecting the next rate move to be upwards. While I personally have my reservations about this prediction, it does influence market sentiment and decision-making.

Fixed vs. Variable: The Timeless Debate

Choosing between fixed and variable rates is a bit like deciding whether to bring an umbrella. If you go with a variable rate, you’re exposed to the whims of the market, but you might benefit if rates fall. A fixed rate offers stability, shielding you from rate hikes but potentially costing more if rates drop.

A common strategy is to look at where banks are setting their fixed rates compared to their variable rates. This can give you a clue about their expectations. For example, if banks are keeping their fixed rates low, they might be anticipating a rate drop in the near future. Conversely, higher fixed rates suggest an expectation of rising rates.

Timing the Market: A Fool’s Errand?

Trying to time the market perfectly is like aiming to buy a stock at its lowest and sell at its highest – it’s more about luck than skill. Instead of waiting for the perfect moment, it’s often better to make a decision based on your current financial situation and the best information you have.

Right now, for example, if you’re coming off a fixed rate, the leap to current variable rates can be a shock. We have had clients who secured fixed rates under 2% for four years, which was an incredible deal at the time. As these rates expire, moving to a variable rate of around 6.14% feels like a cold splash of water. To mitigate this shock, I often advise clients to start paying their higher expected rate into a savings or offset account well in advance. This way, the transition is smoother, and you’ve already adjusted your budget.

Preparing for the Rate Cliff

There’s been a lot of talk about the so-called “rate cliff” where people who locked in low fixed rates a few years ago are now facing much higher rates. While this is certainly a challenge, it’s not insurmountable. The key is preparation and adaptability.

If you’re in this situation, the first step is to understand your new repayment obligations and start adjusting your budget accordingly. This might mean cutting back on discretionary spending or finding ways to increase your income. Some clients have successfully picked up part-time or casual work to boost their cash flow. However, if you’re looking to refinance, be aware that banks might require a history of this additional income, especially if it’s from casual or contract work.

Equity and Cash Flow: The Twin Pillars

Your equity in the home and your cash flow are two critical factors. For those who purchased their homes several years ago, rising property values may have increased your equity, providing a financial cushion. However, if you bought recently, you might not have this luxury. In both cases, maintaining a positive cash flow is vital.

One strategy to manage your mortgage more effectively is to renegotiate your rate with your current lender. Many people don’t realise how often banks are willing to reduce rates to retain customers. As brokers, we spend a lot of time negotiating with banks on behalf of our clients, often securing better rates without the need to switch lenders. This not only saves you money but also spares you the hassle of moving your mortgage. However of course if your bank isn’t coming to the party, it may be worth engaging a broker to consider alternate options.

The Importance of Planning Ahead

If you foresee potential difficulties in meeting your mortgage payments, the best time to act is now. Don’t wait until you’re in financial distress. Speak to your broker or lender to explore your options. There might be products or concessions available that can help ease the burden.

For instance, some banks offer reduced interest rate buffers for dollar-for-dollar refinances, making it easier for those who have been diligently paying their loans to secure better terms. These opportunities are often not well advertised, so professional advice can be invaluable.

Stay Proactive, Stay Informed

Navigating the mortgage market in times of fluctuating interest rates can be challenging, but with the right strategies and a proactive approach, you can manage your home loan effectively. Keep an eye on market trends, but don’t be paralysed by uncertainty.

Whether you choose a fixed or variable rate, make sure it aligns with your financial goals and current situation. And most importantly, don’t hesitate to seek professional advice – a good broker can be your best ally in these turbulent times

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