Our Interest Rate Predictions
Mortgage interest rates have had some wild swings in the last few years - some of us were lucky enough to secure interest rates down in the 2% range (ah, those were the days…) but then, as our fixed terms came to an end, we’ve been faced with interest rates as high as 6% and even 7%! Interest rates like this have a huge impact on day to day life, with higher repayments putting a big squeeze on our household budgets.
Thankfully, it seems like there’s a glimpse of light at the end of the tunnel: in the past fortnight, the Reserve Bank unexpectedly dropped the official cash rate for the first time in years. And in response, a flurry of banks have dropped their fixed home loan rates, by nearly a whole percent.
But what do you do now? Will interest rates keep falling? Should you fix your mortgage for one year and cross your fingers for lower rates in 12 month’s time… or fix at a lower rate for a couple of years or more?
PREDICTING INTEREST RATES
Trying to predict what interest rates will do in the future is risky - because interest rates are affected by things that haven’t happened yet!
But here’s something to ponder:
If you have at least 20% deposit (or 20% equity in your home), you could fix for one year for around 6.29% at the moment.
Or, if you fix for two years, you could lock in a rate of around 5.85%.
The two-year rate actually represents the average of the current one-year rate, and the forecasted one-year rate, in one year’s time.
You can calculate it like this:
The total interest you’d pay over two years (at 5.85%) is 11.7%
Now, subtract the one-year rate of 6.29%
11.7 minus 6.29 = 5.41%
So, the two-year rate of 5.85% actually implies that at the same time next year, the one-year rate is expected to be 5.41%!
WOULD YOU RATHER…
Would you rather have interest (repayment) savings now of 0.44% by taking the two-year rate, or
Would you rather take the one-year rate, and hope that next year the one-year rate will be lower than 5.41%?
The impact to you really depends on how large your mortgage is. If you have a fairly low mortgage balance, choosing one path or another might not make a lot of difference… but if your mortgage balance is fairly high, the impact can be significant.
To put it into dollar terms, let’s use a working example with a $500,000 mortgage:
An interest rate of 6.29% equates to interest costs of $31,450 (or $605 per week) for the one year that you’re paying at that rate.
The interest on a rate of 5.85% is $29,250 per year or $562 per week.
The interest on a rate of 5.41% is $27,050 or $520 per week.
So - in this scenario, if you fixed for one year at 6.29%, and then the second year you were able to fix at 5.41%, the total interest you would have paid over two years would be $58,500. If you fixed for two years at 5.85%, the total interest you will pay over the two years is the same - $58,500.
If you fix for just one year instead of two, and the interest rates fall even lower than our prediction of 5.41%, you’re going to come out on top. But if the interest rates don’t come down far enough or fast enough? Well, in that case, you’d have been better off fixing for two years.
To choose what’s right for you, calculate some scenarios in dollar terms for your mortgage balance, and then weigh up your personal circumstances, your household budget, and any important future plans or events (both within and outside of the 1-2 year period we’re talking about here)…
Need some solid advice from an independent mortgage specialist? We got ya! We can help you get the best interest rate possible, and also help you decide how long you should fix for. Contact our mortgage brokers today.
Our blog is not intended to be taken as personal advice and is for informational purposes only.
Before acting on this information, contact our mortgage broker to ensure it is suitable for your circumstances.