Since the US Election we have had a substantial increase in bond yields and inflation expectations. The result is significantly higher expected future interest rates, including for Australian Home Loans.
Based upon maintaining a margin above where the cash rate is expected to be (2.25% premium), the lowest discounted variable rates are, on average, expected to reach 5.60% within 10 years.
The key point here are that this may be the turning point in the Australian interest rate cycle. For borrowers who are unable to reduce the principal amounts on their mortgages and do not expect good wage growth, this potentially introduces future mortgage stress risk. 5.60% comes close to being a 2% increase on where the loans can be obtained at the moment and 2% rate increases is a critical point in many loan serviceability tests.
We believe the best way to mitigate this risk is by opting for one of our 10-year FlexiFix mortgages. The interest rate is fixed for 10 years but borrowers can repay, refinance anytime without break fees after 3 years. If rates don’t go up, they go down or you feel more comfortable in being able to manage interest rate rises, then you can switch without facing any further costs.
This can be done with a straight mortgage or with a split loan (part FlexiFix, part variable).
We have assigned a 50% probability on the 4 Major banks increasing their Variable Rates over the next month.
2, 3 and 5-year fixed rate mortgages have already seen their offered rates increase and further pressure on wholesale markets will lead to costs being passed onto existing borrowers who have variable rate products.
To find out more and be the first to obtain the loan when we launch, visit www.huffle.com.au