Advice matters
Refixing or refinancing in a high interest rate environment

The past few years have been a hectic time to be a home loan borrower.

As post-pandemic inflation hit, interest rates rose at their fastest pace on record, from as low as 2.5% to more than 7%.

While things are now more settled, the fact that a surge of borrowers have opted for shorter-term fixes may indicate many people are hanging out for interest rates to drop.

So what do you need to know if you’re thinking about refixing or refinancing in this higher interest rate environment?

What lies ahead?

The Reserve Bank said in its April monetary policy update that it expected inflation to return to its target band of an annual rate of increase of 1% to 3% by the end of the calendar year.

Commentators have said that should mean that it can start to reduce the official cash rate towards the end of 2024, perhaps in November.

Financial markets tend to price in reductions in cash rates before they happen, so it is possible that retail interest rates could start to move down ahead of that time.

But don’t expect a return to 2021. Commentators have said it is most likely that rates will fall to somewhere around the historical average, rather than anything like the lows seen during Covid.

What are the options?

People thinking about refixing or refinancing at the moment have a range of options available to them.

While fixing for 12 months is becoming more popular and allows for the opportunity to refix much sooner than a longer fixed rate period, it might be more expensive than a longer-term fix.

ANZ’s economists calculated that for back-to-back one-year fixes to work out cheaper than fixing for two years at 6.82%, the one-year rate needed to fall from 7.25% to 6.38% or below in a year’s time.

The right fixed rate term for you will depend a lot on your circumstances, and there is no one-size-fits-all “correct” solution.

Changes coming

The home loan market is set to go through a period of change. The Reserve Bank has been consulting on proposed debt-to-income ratios, which it said it would look to enact in the middle of the year. These would limit how much people could borrow, according to their household incomes.

At the same time, the Reserve Bank said, it would plan to relax loan-to-value restrictions a bit.

Investors are also having their ability to deduct the interest on their home loans from their rental income for tax purposes returned, at a rate of 80% this tax year and 100% from the next.

Help is at hand

As professional advisers, the SHARE team is in the market all the time and can help you make sense of changing conditions. We can help you work out which lender could be a comfortable fit for you, or talk about your options when it comes to choosing a fixed term. If it’s time you had a professional by your side, drop us a line today.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.