House hunters face rising fixed mortgage rates, with further hikes expected

House hunters stretching themselves to get into the property market are being warned borrowing costs could rise sooner than expected, with some mortgage rates already increasing and further hikes expected later this year.

While the Reserve Bank is not expected to lift interest rates until 2024, costs for longer fixed-term loans are already on the rise – with only a handful of lenders still offering the ultra-low rates reached last year.

Four-year fixed term rates across the big four banks are now all back above 2 per cent, with NAB lifting its rate last week, following similar moves by Westpac and NAB earlier this year. ANZ’s rate never fell below 2 per cent.

Only three lenders are now offering four-year rates below that level, down from 25 at the start of the year, and they’re unlikely to stay at such levels for long, said Sally Tindall, research director at RateCity.com.au.

Thirty lenders have now hiked at least one four-year fixed rate in the last two months.

“Banks are shutting the door on record low four and five-year rates. Three-year rates are likely to be next, potentially in the second half of this year,” she said.

Experts warned back in March that competitive fixed rates had probably reached their lowest point, with bank funding costs to rise after the June 30 deadline for a pandemic-era program that offers cheap three-year funding to lenders to reduce their costs, and in turn reduces interest rates for borrowers, known as the RBA’s term funding facility.

Ms Tindall said the recent rises were the “canary in the coal mine” for borrowers, showing banks had already started to factor in future  funding cost rises and interest rate hikes.

Those fixing at ultra-low rates would likely face “vastly different” borrowing costs in a few years, Ms Tindall warned. While the banks build in a buffer, borrowers needed to make sure they would be comfortable with increased repayments in future — particularly those already stretching themselves to keep up with rapidly rising property prices.

“Lots of people are taking on larger loans at the moment — larger amounts of debt as they’re fixing at record low rate, in two or three years’ time they’ll be facing revert rates that are significantly higher,” she said.

She said more than a third of borrowers with the big banks have been fixing loans in recent months, with up to about 46 per cent of new loans fixed at NAB. While four-year terms had been popular when offering ultra-low rates, borrowers were now expected to gravitate back to short terms.

Mortgage broker Azm Khan, principal of Yellow Brick Road Parramatta, had already seen more borrowers opt for shorter fixed terms, but said the number of clients looking to fix part or all of their loan was still on the rise.

“[The recent rate increases are] definitely having an impact, just [this week] I had to change a customer’s application from a four-year fixed loan to three-year fixed, because the four-year rate has gone up,” Mr Khan said.

“People are going, ‘we should get in before the rates are beyond our reach’, [but] of course there has already been an impact on their capacity to borrow [on longer fixed terms], especially for investors, first-home buyers can get similar rates across a two or three year period.”

Broader demand for home loans and refinancing had cooled down a notch, Mr Khan noted, with increased interest off the back of HomeBuilder, the First Home Loan Deposit Scheme and record low interest rates, having largely worked their way through the system. But demand from investors was on the rise.

Mr Khan expected more borrowers would turn back to variable rates in the coming years, as the banks offered better deals on them as fixed rates climb. Borrowers should look out for good discounts, he added, but warned variable rates too would go up over time and could leave borrowers exposed to sharper rate rises.

It was a similar story at Aussie and Lendi, with both groups seeing an increase in the proportion of customers fixing their loan rates, said Lendi Group chief executive David Hyman, who is also a director of Domain Home Loans.

Refinance activity has been incredibly strong over the past year, he noted, with a significant proportion of customers taking some kind of fixed-rate approach to take advantage of current low rates and soften the impact of potential rate increases in the medium to long term.

“One certainty is that rates will not stay at record lows forever, so you need to be able to meet your repayments when conditions change,” he said.

Mr Hyman warned choosing the right loan was not just about locking in the lowest rate, and urged borrowers to also consider the features, flexibility and fees that were most appropriate for their goals and needs.