Is it time to fix?
The world’s economy is coming back into a slightly inflationary cycle, and is slowly starting to show green shoots. The IMF has revised the world economic growth forecast for 2021 from 5.5% in January to 6%[1]. So that’s great for business and jobs, but it does mean that the cost for banks borrowing money from overseas is going to increase.
And it started earlier this year - the Commonwealth Bank of Australia raised their 4-year fixed rate for home lending by 0.2% to 2.19% p.a.
It’s not a big jump, but it shows you that the boffins in the banks are forecasting interest rates to increase. So we could say we have reached the bottom of the low rates[2].
That’s not a ‘Henny-penny - the sky is falling!’ statement, it’s just being aware of the current environment and how you might make it work to your advantage. The message is – if you have a home loan then now’s the time to consider fixing it if that suits your situation; or if you are looking to purchase then consider a fixed rate.
But since we are stepping into an inflationary environment, it’s important to know about rate locks.
Did you know that even when you get an approval for a loan at a low fixed rate, the rate can actually increase in the time between approval and settlement?
The bank will settle on the higher fixed rate, they will not honour the approved fixed rate unless you have paid a fee called ‘rate lock’.
Rate lock is generally 0.15% of the loan amount. For example $400,000 x 0.15% = $600, however some banks calculate it differently.
Before we all jump at banks for gouging another fee, they have to go to the market they buy their money from and actually set the money at a rate specifically for your loan, so the banks do incur some cost to buy and hold that for your settlement.
Know the rate you are being offered and know how long before you are going to settle. If the gap is too long and there is a chance of the rate going up between approval and settlement, then it might be worth paying the rate lock.
