Do not bother fixing your home-loan rate if you are only going to lock it in only for two years — this would not give you protection from interest-rate hikes. You should also never exceed five years, as fixed rates will only restrict the flexibility of your home loan.
The longer the fixed term, the higher the risk that average rates fall below yours and you pay more than you'd otherwise have to, you also lose some flexibility. Based on the current economic predictions for 2023/24 a 2 year fixed rate could be a good idea if you are able to lock in a good rate before the end of 2022.
How long should I fix my home loan for? Most providers allow you to pick your period that you would like to fix your interest rate to, which can generally be anywhere between one to five years and may depend on the total amount you're borrowing and other loan terms.
In the past 12 months alone, the Fed has hiked rates seven times to combat rising inflation. As of December 2022, the federal funds rate is 3.83%. However, the FOMC predicts that it could continue to rise and peak at around 4.9% in 2023.
Save interest in the long term:
Home loan borrowers will likely pay less interest on a fixed-rate loan over three years. Furthermore, some may prefer to play the long game with fixed-rate mortgages, potentially saving money once rates increase.
A better rate of 6% will be available to those willing to go with a five-year ARM.” Freddie Mac: Forecasts rates dropping from an average of 6.8% in the fourth quarter of 2022 to 6.2% in the fourth quarter of 2023.
"Mortgage rates will decline slightly but end up higher overall across 2023. Expect interest rates to continue to rise and mortgage rates to reach their peak over the summer above 10%."
Will interest rates go up or down? An interest rate forecast by Trading Economics as of 15 December predicted the Fed Funds Rate would hit 5% in 2023, before falling back to 4.5% in 2024.
And for the average owner-occupier paying a variable rate, your home loan rate could reach 6.61% by the first half of 2023. For February (the next RBA meeting) all the big four banks have forecast another 25 basis points hike to the cash rate.
In fact, a recent New York Federal Reserve housing survey found that 30-year mortgage rates are expected to rise to 6.7% before 2023 and to 8.2% by 2025. And some experts predict it's going to go even higher.
Pros: Long term stability: with a 5 year fixed rate deal, you'll have a longer period of financial stability. This is especially useful in times of economic uncertainty, when interest rates are fluctuating a lot. Longer term fixed rate deals are also available (up to 40 years with the Habito One mortgage).
If you have a low loan-to-value (the size of your mortgage as a percentage of your property value) then you could almost certainly benefit from fixing, as you will be able to secure a low fixed-interest rate. The longer your fixed term, the longer you are locked into a lower interest rate.
Because your repayments will be the same for two or more years, you can plan your finances further ahead. Less risk. With economists predicting a recession, fixing at today's rate for more than a year could be less risky.
2 or 5 year fixed mortgage 2022 into 2023
Now that the interest rates have risen so much during the second half of 2022, it's been our observation that choosing a 5 year fixed rate could leave you with a high-interest rate even when rates start to fall.
When borrowers remortgage in the near future it is likely to be at a higher rate of interest. This can be seen in the Office of Budgetary Responsibility (OBR) expectations of the future path of the Bank Rate, which is expected to peak at 4.8% by the end of 2023.
Can you sell a house with a fixed-rate mortgage? You absolutely can, there are no legal restrictions on this type of transaction, however, it's fairly unlikely that you'll be able to avoid paying fees if you choose to do so before your fixed-rate period ends.
For Australia's interest rate prediction, the NAB expected RBA to hike the cash rate by 50bps to 3.60% in March 2023 and keep it unchanged until the end of 2023. RBA was forecast to cut the cash rate to 3.10% in March 2024 and to 2.85% in June.
Fed officials do expect to begin lowering rates in 2024, but they anticipate bringing them down slowly.
“Our view that interest rates will be reduced from 4.5 per cent to three per cent by the end of 2024 envisages more cuts than either the consensus or the markets.”
That's a sharp rise from what it was implying just a month ago (around 2.5%-3%) and vastly up on expectations of around 1.5% six months ago. But the curve then predicts that rates will drop back sharply and will be around 3% by late 2025.
Interest Rates for 2021 to 2027. CBO projects that the interest rates on 3-month Treasury bills and 10-year Treasury notes will average 2.8 percent and 3.6 percent, respectively, during the 2021–2027 period. The federal funds rate is projected to average 3.1 percent.
In December 2023, the average rate on a five-year fix will be 4.48pc, just below the Bank Rate at 4.5pc, Capital Economics forecast. In January 2024, mortgage rates will fall again to 4.37pc, before the Bank Rate drops to 4.25pc the following month.
Our other experts agree: The slowdown in home sales that beset the second half of 2022 will continue into 2023. Sharga believes the number of sales will continue to slow, likely hovering in the 4.5 million range, with new-home sales at around 600,000. Listings may no longer go at a lightning-fast pace, either.
However, many industry experts believe within 18 to 24 months rates will be back to a more 'palatable' level. Somewhere like 2.5% to 3.5% for example. We can't expect rates to reduce as low as what we have been seeing in recent years, which in the industry we refer to as 'covid low' rates.