There has been a lot of “will they, won’t they” speculation about the RBA’s cash rate announcements. Interest rates are big news as they have a significant impact on the financial decisions we face, so what does it mean that fixed rates are on the move?
Recently, we’ve begun to see some movements for the fixed interest rates, with a number of lenders starting to cut their fixed rates after many years of rises (and some stagnation) in anticipation of a future rise to come.
To understand the current landscape, it’s essential to grasp how interest rates work. The Reserve Bank of Australia (RBA) plays a crucial role by setting the cash rate during its regular meetings. The cash rate is the interest rate on overnight loans between banks and is a key tool for managing inflation and economic growth. When the RBA changes the cash rate – either raising it to combat inflation or lowering it to stimulate the economy—these adjustments ripple through the financial system.
However, fixed interest rates are a bit different. While variable rates fluctuate with the cash rate, fixed rates are determined by individual banks based on their expectations of where the cash rate is heading in the future.
The current trend of fixed rates declining
In recent months, we’ve started to see a decline in fixed interest rates across some providers. So, what’s contributing to this shift?
Inflation trends:
While inflation surged during the pandemic, there are signs that it is stabilising and even declining. With inflation expectations easing, banks may feel more confident in offering lower fixed rates.
RBA’s role and commentary:
The RBA has adopted a cautious approach, being very open about its commitment to stabilising inflation as its major focus. Changes to the cash rate by the RBA are a powerful lever in bringing inflation down. The RBA has stated its objective is to get consumer price inflation (CPI) back down to between 2 and 3 per cent and the trend is now heading in that direction.
This kind of shift signals to banks that the environment may become more favourable for borrowing, prompting them to reduce fixed rates in anticipation of a better lending landscape.
Increased competition:
The mortgage market is highly competitive, with lenders eager to attract borrowers. As banks compete for your business, lowering their fixed rates can be a way to gain an edge. This is good news for borrowers, as it leads to more attractive options in the market.
Considerations
It all means fixed rates are becoming relatively more attractive to borrowers, but the question is whether the initial moves are enough to shift the market somewhat away from variable rates.
With the cash rate still on ice for now, more than 95 per cent of home lenders are opting for variable deals. This is a remarkable difference from the height of the pandemic, when fixed rates accounted for as much as 46% of loans issued.
If you are thinking of taking on a fixed rate loan or refinancing to a fixed rate it’s important to consider timing. Interest rates can fluctuate, the landscape remains dynamic, and predicting their movement can be challenging.
It’s also important to weigh up the pros and cons of fixed versus variable loans. The beauty of fixed rate loans is the stability in repayments protects you from rising rates and simplifies budgeting. So, for those who value or need that certainty – say your debt level is high, your cash flow position isn’t strong, and you want to take some risks off the table – fixed rates can be a viable approach. Lower fixed rates can also lead to significant savings; however, you do need to consider that it is likely to be early days for fixed rate movements and you may miss out on further savings should rates continue to fall, when the cash rate is revised downwards. Additionally, fixed loans often have limited flexibility regarding extra repayments or early exit fees.
In any case, whether you’re a first-time buyer or looking to refinance, it’s good to stay informed as understanding the current climate can empower you to make the best decisions for your financial future.
We can help you navigate this evolving landscape and make the most of the options available to you.
If you are starting your journey to buy a home, one of the first things you need to do is determine what you will be able to borrow so you are narrowing the field to hone in on properties you will likely be able to afford.
A couple of the terms you may have come across when you are at this stage of determining your borrowing power are ‘pre-qualification’ and ‘pre-approval.’ While these sound like they might be the same thing, there are some important distinctions between them a home buyer needs to understand.
Differentiating between pre-qualification and pre-approval
When applying for a loan, the main difference between pre-qualification and pre-approval lies in the depth of scrutiny and commitment from the lender, with pre-qualification being more of a guideline and pre-approval being more solid.
Pre-qualification – a non-binding estimate
Pre-qualification is the first step in the mortgage process, providing an estimate of how much you may be able to borrow based on self-reported financial information. This preliminary assessment typically involves a basic questionnaire or a conversation regarding your income, assets, debts, and credit score.
There are some benefits to going through the pre-qualification process. It gives you a general idea of the price range of homes you can consider, guiding your initial search.
Pre-qualification usually does not involve a hard credit inquiry, so does not have any impact on your credit score and finally it provides early insights into potential financing options.
However, it’s important not to make the mistake of thinking a pre-qualification and pre-approval is a binding indication of how much a lender is willing to provide. As the information you provide is not verified, it’s considered less reliable and it’s a good idea to consider a pre-qualification as more of a ballpark figure of what you could potentially borrow.
Pre-approval – a detailed commitment
Pre-approval is a more rigorous process where a lender verifies your financial information and provides a conditional commitment to lend up to a specified amount under certain conditions. This involves submitting documentation such as wages, bank statements, and tax returns for thorough evaluation so you’ll need to get your financial house in order prior to the pre-qualification process.
At this stage we’ll work with you to review your options in terms of mortgage products and lenders. When you are ready to apply for pre-approval, the selected lender then verifies this information and performs a credit check to assess your financial situation in detail. Based on this verification, the lender provides a conditional commitment to lend you a specified amount under certain conditions.
The advantages of pre-approval for property purchases
As we enter the warmer months the housing market typically sees increased activity and competition among buyers, which is why obtaining pre-approval should be a priority if you are getting serious about buying. Pre-approval does not just provide potential lenders with a comprehensive view of your financial health, it also empowers and informs your decisions. Knowing your approved loan amount allows for more precise budgeting and confident negotiations.
Armed with a pre-approval letter, you can concentrate on properties within your budget range, optimising your time and efforts. In a bustling market, sellers are more likely to favour offers from pre-approved buyers due to greater assurance of financial capacity and the potential for a swift transaction.
Pre-approval will also enable you to move faster and speed up the process of finalising your loan should you be successful in your bid for your new property. When you find the right home, the last thing you want is to miss out as your finances took too long.
Planning ahead for a successful purchase
If you want to purchase in the next few months, now is the ideal time to start preparing for your home purchase journey.
Start your journey with confidence by chatting to us at the pre-qualification stage and obtaining pre-approval early, ensuring you’re well-positioned to capitalise on opportunities and achieve your homeownership dreams as the property market warms up alongside the weather.