Most borrowers are attracted to the certainty a fixed-rate home-loan product offers, especially those who are budget-conscious. In fact, it is advisable for first-home buyers to take on a fixed-rate loan to be able to organize their budgets easily and to stay on top of their repayments.
Locking in early can help you get what you were budgeting for from the start. As long as you close before your rate lock expires, any increase in rates won't affect you. The ideal time to lock your mortgage rate is when interest rates are at their lowest, but this is hard to predict — even for the experts.
Is it better to have a fixed or variable rate loan in 2022? Whether it is better to have a fixed or variable rate loan is completely up to the individual to do their own risk assessment based on their own personal situation and determine how changes in the market may impact their ability to make repayments.
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.
Once locked, the loan's interest rate won't change — no matter what's happening with the economy — barring any changes to your application details. You're protected from higher rates, but you won't get a lower rate, either, unless you have the option for a one-time "float down."
But a steady decline in rates the past two months have convinced more economists that rates could level off through early 2023, barring an economic downturn. The average 30-year, fixed-rate mortgage was 6.33% for the week ending January 12, down from 6.48% in the previous week, according to Freddie Mac.
The main reason why borrowers fix their loans is to protect them from sudden interest-rate hikes. To make sure that you maximise the interest-rate protection a fixed rate provides, see to it that you only lock in your loan for three to five years.
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.
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.
Interest Rates Will Go Up
The average rate on a 5-year fixed mortgage is forecast to rise by 0.3% this year, rising further to 1.2% next year and 2.1% in 2024.
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.
ANZ and Westpac believe the cash rate will hit 3.85% in May 2023. NAB has hedged bets on a 3.60% peak by March 2023, while CommBank forecasts a more dovish approach, with another 25 bp rise in February bringing the terminal cash rate to a rest at 3.35%. Currently, the end-of-year cash rate sits at 3.10% for 2022.
How high will interest rates go in 2022? Another Fed rate hike means banks could respond by raising rates on savings and loan products. For savers, experts expect that more high-yield accounts will approach 3.50%-4.00% APY before the end of the year.
A 5-year fixed-rate mortgage is a pretty good bet if you don't want to lock yourself into a deal for years and years but you still want certainty for longer than your standard 2-year deal.
While the economy appears to be moving in the right direction, the Fed noted in its minutes that inflation is "unacceptably high" and still remains well-above the pre-pandemic level of 2% — and it anticipates rate hikes will continue throughout 2023.
Mondays Are Safe, Wednesdays Are Unsafe
According to data compiled from MBSQuoteline, a provider of real-time mortgage market pricing, mortgage rates are most stable on Mondays, making that day the easiest on which to lock a low rate.
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.
“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.”
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.
However, the Fed sees broadly sees one or two more hikes than the market does in 2023 currently taking rates materially over 5%, whereas markets aren't sure rates will exceed 5%.
NAB: Early 2024
NAB is forecasting the cash rate will reach 3.60% by March 2023 and stay there for the remainder of the year, before dropping by 50 basis points to 3.10% by March 2024.
Evangelou expects rates to average around 5.7% in 2023. That's significantly higher than the rates around 3.5% that buyers saw in the first months of 2022, but it's also a far cry from the rates that climbed above 7% last fall.
INTEREST RATES: CASH TARGET RATE
"We think we are near the end of the RBA's tightening cycle and expect one further rate hike in Q1 23 that will take the cash rate to 3.35 per cent," Aird said. "From there we have the RBA on hold as much slower growth in demand is expected to see inflation come down in 2023.
A fixed term rate can be advantageous in a few different ways: Peace of mind that you rate is locked in and won't change for a set time. Budget consistency. Locking in when rates are a low can save you money should variable rates go up during the fixed term.
The charge for a rate lock could range from 0.25% to 0.5% of the amount of your mortgage. For example, on a mortgage loan of $450,000, a 0.25% rate lock deposit would be $1,125.