Your finance options after July 31
This Wednesday, July 31st, the Australian Bureau of Statistics (ABS) will release the inflation data for the June quarter. A 1.1 per cent increase or more, will mean inflation is still too high. This will average out to over 4 per cent a year, above the Reserve Bank of Australia's (RBA) targeted range of 2 to 3 per cent. Rate hikes in August, as a result, could be expected when the RBA next meets. Some economists believe the RBA should have already raised rates further, due to persistent inflation. A rate increase could negate recent budget-delivered cost-of-living relief, and tax cut benefits. It could also hurt borrowing capacities, and dampen consumer and business sentiment. Lately, we've been asked, 'When will rate increases stop?' and 'Should we fix our loans now?' All of these questions and more, we explore, in this month’s Black & White Finance update.
Will the RBA be forced to raise rates in August?
In May, the RBA forecasted an annual inflation rate of 3.8 per cent by the end of June. If the data this coming week shows we're above this, it will be hard for them not to raise rates to cool the economy.
Big banks, including ANZ and AMP's Shane Oliver, expect inflation to sit at 3.9% annually, slightly above the RBA’s target. They believe if inflation exceeds this forecast, the RBA might hesitate to raise rates due to rising unemployment risks, weak growth, low consumer confidence, and tough business conditions – recession fears.
Judo Bank’s economist Warren Hogan expects June's inflation data to also surpass the RBA's projections, but he believes this is leading to a rate increase in August. If the quarterly data exceeds 1.1 per cent, annualising to over 4 per cent for the first 6 months of 2024, it will be difficult for the RBA not to hike rates. He also suggests that the debate could then shift to whether another rate rise is needed in September.
Is it now time to fix?
Most experts believe rates will remain on hold, until early to mid next year. What is uncomforting, is Warren Hogan, one the most accurate of the economists surveyed in 2023 when it came to interest rate predictions, is saying otherwise.
As a borrower, do you feel in yourself that his view is more objective and more accurate, or do you feel the expert from Judo is simply playing devil's advocate? If the track record is anything to go by, he's likely to be the one on the money.
You could simply lean on the side of caution and just fix for a year or two because not even the experts can agree on the matter and guarantee your repayments but then you run the risk of losing out if rates do come down. Here are the top fixed rates for 1 year at the moment, for an owner occupied loan, making principal and interest repayments.
Here’s the competitive fixed rates for 2 years at the moment, for an owner occupied loan, making principal and interest repayments.
Now, let’s look at the competitive variable rates, for the same type of loan, making principal and interest repayments:
Looking at these decent variable rates, for the same loan type, it’s not that different to the 1 and 2 year fixed rates. If the general consensus amongst the experts is that rates are likely to drop in 2025, it’s a bold bet to take, to lock a fixed rate today for 12 or 24 months, that isn’t significantly different to the other – you’re not much worse or better off.
No one knows for sure when rates will come down but most are predicting between early to mid 2025. ANZ continues to expect three cuts in the cash rate over 2025, with a low of 3.60%. NAB predicts the same, with the cash rate to drop in June 2025, hitting 3.60% by December 2025. See here NAB's Interest rate forecast, quarter by quarter to December 2026.
All variable, all fixed, or a mixture of the two?
If we lock in a 1 or 2 year fixed rate, yes our repayments are guaranteed but then we cannot offset that loan portion like you can with a variable loan, have early termination fees, and are run the risk of not riding the rate on the way down, as we suggested above. To hedge against this risk, you could put a portion of your loan on a fixed rate, and another portion of your loan on the variable. Or, we could leave it all variable now and come back fix your home loan in the future. The money markets are what determine the fixed rates so as the markets start to predict that we’re getting closer to rate cuts here in Australia, we will see these fixed rates start to drop across the board at the bank level and then at any point in time, we can lock in.
It’s no easy feat to time this market to perfection. No one can. It’s impossible unless you’ve got a crystal ball or a time machine. And given how volatile the current climate is, it’s too risky to have an aggressive view towards one way or another. Having said that, in our own recommendations at Black and White Finance, we’re mostly sticking our clients with variable home loans at the moment, with a few fixed loans. Interesting it is to see the share of fixed-rate lending over the past years and how it's also skewed towards the variable. Our mix mirrors the data for the broader Australian population as detailed by the RBA below.
If you open the hyperlink from the image provided here, scroll to pages 28 & 29 of the hyperlinked Bulletin from the RBA for more information on the data set referenced here.
Final thoughts
All eyes will be on the ABS’s data on Wednesday 31 July, and again, if you hear the number for the quarter start with a 1 point something, this means underlying inflation is stuck above 4 per cent. The RBA will then find itself under immense pressure to increase rates when it then meets in August. If it’s under, then we should be able to breathe a sigh of relief as we all try to stand tall and stare down inflation for a while longer. The decision on taking a fixed or variable rate comes with a few layers of complexity and not something to be taken lightly but hopefully, the information and transparency above, helps to make the topic a little clearer for the many coming to terms with the decision. The closer we stay to the data, the more informed we are to make decisions in our best interests. All of this makes for an environment where the borrower needs sound, objective and well-informed general advice.
If you want to know more about the different rates, terms, or bank specials on offer at the moment or just have a general question, please send a note to peter@blackandwhitefinance.com.au or click the start today button a little lower. With the help of our amazing Black and White Finance team, we will be able to support you.
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