Fixed rates may have peaked

From last October, fixed rates have been rising aggressively. The wave came, and it hasn't stopped since, with regular fixed rate rises occurring over the past 9 months.

What are fixed rates at the moment:

• Fixed rates start ~5% for P&I OO loans and rise past 6.5% for INV IO loans. Less than a year ago, the same products were priced in the high 1% range and early 2% range.

Why will fixed rates stop rising, and potentially fall?

• Fixed rate funding costs are tied to expectations of future interest rates both internationally and locally.
• These markets, which have been rising rapidly over the course of the past year, have had a stabilised and are moderating.
• They are also pricing in interest rates being stable over the longer term, which suggests there won’t be any premium for longer term fixed rates over shorter term ones (and indeed they could be cheaper).

Last 12 month chart: rapid rise in long term rate expectations over the past year. Fixed rates have adjusted similarly.


Last 3 month chart: recent moderation in rate expectations. Fixed rates rises may moderate and there may be some cut-back soon.

If they fall, how much will they fall by?

• For now, market indicators are suggesting a stabilisation or modest fall. Some banks are still adjusting their fixed rates to higher funding costs, so these banks will continue to have increases in coming months playing catchup and are delayed. Nonetheless, some of the big bank fixed rates already assume a higher funding cost that is no longer the case. These rates may come down a little bit.

What factors will determine market pricing of fixed rates in the period ahead?

During this volatile period, markets are adjusting to new information sets:

• Data sets that show ‘upside’ surprises to inflation that suggest it is here to stay will likely drive funding costs up.
• Meanwhile datasets that show inflation is likely to moderate, will continue to drive funding costs lower. This could be data showing the economy is slowing, unemployment rising, or other factors that suggest inflation will come down.
• Communication from central banks also play a key role. ‘Hawkish’ communication that suggests further rate rises above expectations will drive funding costs up. Meanwhile, ‘Doveish’ communication vs expectations will drive funding costs down.

Does this mean I should fix?

• Fixed rate demand has fallen dramatically and will continue to do so.
• They are much more limited in terms of flexibility and already cost more than variable rate mortgages.
• Overall, the demand for fixed rates should remain low. We generally would not recommend them at this level for now (subject to a very uncertain macro outlook on future rates).
• With rising variable rates, there has been some panic by some borrowers rushing to fix their loans in fear of the current RBA rate rising cycle. This may have been an expensive decision if it occurred recently.

What impact will it have on the market?

• For now, not much - the fixed rate market is still predicting a continuation of interest rate rises, up to around a 3% cash rate.
• It is, however, a good market to watch for those seeking to ‘buy at the bottom’.
• If this market begins to show some serious falls in future, then it may suggest the bottom is close.

Does this mean fewer RBA rate rises are coming?

• The RBA have indicated more rate rises are coming in their latest rate rise announcement.
• The adjustment of fixed rates may be the markets expectations of what the ‘peak’ cash rate will be in this cycle. The fixed rate market suggests the terminal cash rate may be lower than expected in June, albeit still much higher than most predicted at the beginning of this year at around 3%.

 

Don't think anyone would have opted to fix in the last 3-4 months.

 

Seeing some reduce already as per mac reduces Middle to long term rates

 

I fixed for 2y at 3.4% in April. If I hadn't I would be paying 4.45% variable today.

 

I rate locked at 4% IO for 3 years just 2 months ago. If you locked in a fix rate before June's rise, you've probably done well.

 

Yep agree with Redom. Forward rates definitely show signs the fixed rates on offer today are somewhat at the peak which is a sign of relief for future end rates.

 

Fixed rate demand has definitely dropped off. Nonetheless, we definitely get asked more to show fixed rate options and discuss whether they should take it or not. Theres some further education work to do to advise that it may not be the best time given the 'peak' part to fixed rates at the moment. Some, probably irrationally, are worried inflation and interest rates will go to double digits.

 

Cba just brought 4 year fixed product down to 4.99% (along with the 0.50% variable rate rise).
Longer end fixeds to come down a little.

 

1.60% off their current 4 year fixed offering, reckon others will follow.

 

If fixed rates go to low 4s then it can be attractive to some people for the peace of mind. Not so much in the 5s.

 

Any good IO Investment property fixed rates in the early 4’s out there

 

Love the analysis, thanks @Redom

 

I'm banking on the cash rate eventually settling to below 1.5%...at that point I may consider fixing but not now. Not in the short term.

 

Looks like US inflation came under expectations. May contribute to the position here that fixed rates peaked.

Anything could happen, biggest risk is Geopolitics atm

 

If only Putin and the CCP were overthrown....oh well.

 

Latest update... 3 year yield has risen since the start of the month.

 

There is a news that Suncorp also dropped fixed rates across the board? Perhaps someone can share the full rate table after this change.

Might give people some confidence about where rates can go and inject a little confidence to the market?

 

Probably the best valued fixed product at the moment IMO - especially for those very concerned about future rate rises. A sub 5% rate over the next 4 years would help with SANF (are we still using this acronym? lol) for some borrowers.

Cheers

Jamie

 

Bankwest just announced reductions to their P&I Variable Rates, Investment and Owner Occ (0.10%) and their 2 year fixed Owner Occ P&I Loan product reduced by 0.70% now 4.99% - suspect other banks may follow