To Fix or Not to Fix ...in a Covid Recovery
Just a few weeks ago in early February the RBA was very clear that low rates were here to stay for at least the next 4 years. In return the banks lowered their fixed rates (but not their variable rates, which is about 75-80% of their customers). And as banks like to do they yelled these low rates at you from every roof-top and billboard in town.
Fast forward to today (3 March 2021). Today's GDP numbers show that the economy grew at 3.1% for the December quarter on the back of 3.6% for the previous September quarter. These are very big rates of growth and much bigger than anticipated by all the economists at the RBA and the banks. These growth rates have not been seen in Australia since the 1980's (when home loan rates were 13 - 18%).
Slightly more difficult to explain (and I am not going to try) are the last 10 days or so of bond rates. Mortgage rates and particularly fixed mortgage rates usually follow the ten year bond rates. Well, ten year bond rates have started tracking upwards all of a sudden.
Let's switch to house prices. This time last year all the banks were issuing dire warnings regarding house price "crashes". The smartest most highly respected and highly paid economists from the big 4 banks were predicting 10 - 30% drops in house prices. As your mortgage broker I started preparing for the worst. April 2020 rolled by with only small hiccups, but clients kept on buying. May came and went and although some clients were affected by Covid declines the majority were looking for opportunities to buy a new investment property or a holiday house down the coast. The last three quarters for Blue Zinc have seen some of our biggest months ever.
Given the above movements, the RBA may now be looking at ways to "tap the brakes" or slightly slow things down ...just a smidge.
Sure wages growth is stagnant and unemployment and under-employment are still problematic, but at the same time the RBA would like to see the economy ticking along at the 2-3% zone. There is no reason for any harsh movements like increasing the cash rate - just yet - but they will be looking at other measures to slow down lending and try and take a little heat out of the economy and in particular house prices.
All this seems to be leading to a faster than expected recovery. Similarly, the RBA may be considering an upward movement of the cash rate sooner than the four year plan discussed in February.
So if you could get (which you can) a 4 year fixed at around 2% for your home loan or 2.3% for you investment property I'd be considering these options very carefully. Rates may not be rising soon, but they're extremely unlikely to go down any further. Best bet would be they go up - but it's just a matter of when?
I should say at this point that I am just a mortgage broker. The best economists in Australia can't be sure about their predictions and get it wrong about 50% of the time. But a '2 point something' or even lower fixed rate is not going to be a "bad" decision and could turn out to be a ripper decision if rates start to edge up a little in the next few years.