The cash rate has been trending upward, rising from 0.1% in April to 3.0% in December 2022.
It is likely that the cash rate will continue to increase up to the vicinity of 3.0% by the end of this year or early next year, whilst the inflation rate remains high and the unemployment rate remains at historical lows.
The current variable rate is 7.30% at CBA and 6.27% at NAB, while the 1 year fixed rate is 5.14% at CBA and 5.29% at NAB. This suggests that fixed rates are more favorable in the context of further possible rate hikes in the next months.
However, the 5 year fixed rate is currently set at 6.84% at CBA and 6.69% at NAB, which is comparable to the worst case scenario where the cash rate could reach 3.5% that translates to a variable rate of 6.75% at CBA and 7.42% at NAB.
Taking into consideration all data and trends, fixing the rate at up to 2 years is more favorable to borrowers under the current climate, while there is no difference between fix and variable rates for a longer time frame, such as > 2 years.
What are the advantages to fixing an interest rate?
Peace of mind that your rate is locked in and won’t change for a set time
Budget consistency
Locking in when rates are low can save you money should variable rates go up during the fixed term.
There are some cases when fixing your rate is not going to be a good idea. This includes:
Wanting to make extra or a large repayment on the loan
You plan to sell the property during the fixed term
You want to refinance the loan during the fixed term
You need to use your equity during the fixed loan term
You want flexibility on loan or lender
What happens if you break a fixed rate?
If you decide to refinance or change your rate to variable, then you have to pay break costs. This is an amount calculated by the bank using a complex formula. They determine essentially what you should have paid in interest over the period and charge it as a fee instead. It is usually very expensive and will often mean breaking your fixed rate is not going to be financially viable.
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