Fear of missing out or FOMO has been one of the biggest drivers in Australia’s runaway property market.
And it is getting all too real in the loan market as well, as a rush of new buyers and a wave of refinancing collides with the reality that longer term loans are now starting to get more expensive.
Many of the large banks have been quietly dropping their really low four-year fixed rate offers, leaving buyers and refinancers with the choice of paying more or taking the chance with shorter fixed loan terms.
Potential affordability crisis down the track after fixed loans mature
That dose of reality has also put a spotlight on a potential loan affordability crisis down the track when the current swathe of fixed term loans expire and look set to be replaced by higher rate floating or fixed rates.
While the Reserve Bank has been absolutely stoic in its claim that it has no plans to raise official interest rates above their current 0.1% until 2024, actual market rates as measured by 10-year bonds and money market rates have been rising, factoring in an ongoing economic recovery, potential inflation and higher rates.
Banks are predicting at least one official rate rise in 2024
Plus, many banks are forecasting at least one rate rise in 2024, which they are building into their four-year fixed loan pricing.
According to RateCity.com.au, 10 lenders including some of the majors have raised their four-year rates in the last month, while at the same time two and three-year fixed loan rates were coming down.
There is little doubt that the record low rates on offer have played a part in the runaway property market and there has been no shortage of bullish forecasts for the market, with UBS recently bumping up their predictions for this year from a 10% rise to 15%.
Predictions should be treated with caution
It should be remembered, however, that the future is inherently unknowable and it was not too long ago that some of the major banks were predicting drastic property market falls of up to 20% as the pandemic took hold and unemployment was forecast to rise sharply.
One thing that has changed with the current low rates is the popularity of fixed rate loans, which have traditionally represented around 10% to 15% of loans being written.
That has surged dramatically as FOMO and a significant gap between fixed and more expensive floating loans has seen the value of monthly fixed-rate loans skyrocket, reaching an amazing $15.7 billion in February.
If you can’t beat them, join them
Some of that will be current loan customers slashing their home loan bills by refinancing with fixed rates but ANZ economics thinks fixed-rate loans are now making up around 40% of the new loans being written.
That has the potential to make this housing boom different to many others that have preceded it because even a rise in interest rates could leave a large swathe of borrowers unaffected as they sit on their fixed loans.
However, while the pain was felt early by home owners when the traditional floating rate loan rose with general interest rate, this time around the effect will be more scattered as a variety of fixed loans mature after two, three, four and five-year terms expire.
Watch out for the loyalty tax
One thing that hasn’t changed for this refinancing boom is that existing borrowers who don’t pay attention to what rate they are paying tend to pay a significant “loyalty tax”.
At the very least, it is worth checking what your current lender is offering to new customers and drawing attention to the fact that as a loyal customer you expect to be treated at least as favourably.
If that doesn’t work, there is always the potential to join the rash of refinancing for either fixed or variable loans, with the usual caveat of checking the extent of fees and charges that are required to switch.