The latest news I want to share with you revolves around the recent announcement by the Reserve Bank regarding the Official Cash Rate (OCR).

If you're not too familiar with how the mortgage market works, the OCR plays a crucial role in determining floating and short-term fixed Home Loan rates. By taking into account various factors like wholesale rates, bank deposit rates, and the banks' profit margins, we can gain insights and potentially predict the future trajectory of Home Loan interest rates in the coming months.

As many expected, the OCR was raised by 0.25% to 5.5% on May 24th. While this wasn't surprising news, there are three important statements made by the Reserve Bank that I'd like to highlight (if you find these things interesting, of course!):

‍

Firstly, the Reserve Bank has indicated that they don't anticipate any further increases in the OCR.

This means that the recent interest rate hike likely marks the end of the upward trend. For homeowners with existing Home Loans, this should be good news. However, it's important to remember that circumstances can still change - inflation can shift, conflicts can arise and be resolved, and unexpected events can occur. So, there are no guarantees. Based on my observations of the Reserve Bank's announcements over the past two decades, they typically only change their stance when there's a significant shift in the figures they track. For now, it seems we've reached the peak interest rate.

‍

Secondly, the Governor of the Reserve Bank has suggested that fixed home loan rates are unlikely to increase any further.

According to the Governor, the recent increase has already been factored into the current Home Loan rates. While a couple of banks did raise their 1-year rates by about 0.2% following the announcement, the Governor's statement is a strong indication that Home Loan rates have likely peaked.

‍

Lastly, the Reserve Bank has announced that the OCR will remain at its current level until later in 2024.

This means there might not be much news to discuss in the coming months! We'll primarily be playing the waiting game for the rest of the year. I'll be closely monitoring inflation figures as they will play a crucial role in predicting when the OCR (and subsequently, Home Loan rates) might start to decrease.

(If you're interested in diving deeper into this topic, we discuss it in more detail in this video)

So, given the current situation, what should you do with your Home Loan?

First and foremost, I would advise being cautious about fixing your Home Loan for an extended period, especially when we're likely at the peak of the market.

Let me share a historical lesson with you: Back in April 2008, five-year rates were at 9.5%, while one-year rates stood at 10.7%. However, within a year, the latter dropped to 5.8%. Many homeowners found it challenging to bear the burden of a 9.5% rate for another four years. Additionally, the break costs associated with exiting those long-term rates were quite significant.

While the potential for such extreme differences doesn't exist currently, with 3, 4, and 5-year rates hovering around 6%, the underlying risk of "fixing long" remains apparent. It's important to recognize this risk in the current circumstances.

As I've mentioned in recent months, I believe the optimal choice is to consider a 1-year or 18-month fixed term. Going for two years might be a bit too long unless you prefer a more conservative approach or need a slightly lower rate right now (keeping in mind the possibility of a higher rate in a year or so).

Splitting your loan between different term lengths is still a viable option to seriously consider. However, in the current climate, I would recommend splitting between 1 year, 18 months, and 2 years. The differences in rates and time periods are relatively small, which means the overall protection you'll receive is also relatively limited.

‍

To wrap things up:

Remember, it's not just the interest rate that matters, but also how quickly you can pay off your loan. Focus on planning your mortgage payments in a way that allows you to pay off your loan as soon as possible. That's where you can truly make a substantial difference in terms of building wealth.

Feel free to discuss your options with your Velocity Financial Adviser. We're here to guide you through the available choices. Keep in mind that everyone's situation is unique, so personalized advice can be highly beneficial.

Brendon.

‍

Book your free mortgage consultation with our friendly advisory team here.

‍

Brendon Ojala (FSP119244) is a Financial Adviser with Velocity Financial (FSP95466). No investment decision should be taken based on the information in this blog alone. Please see Brendon’s disclosure statement on our website.

About Brendon:

Hi, I'm Brendon, one of the owners and advisers at Velocity Financial. I have been giving advice on mortgages and insurances at Velocity for around 15 years, and it is great to be able to work with people to achieve their financial goals. Prior to giving money advice I worked as a youth worker and managed teams for a not for profit organisation. I live with my wife and one of my sons (the other one only stays when he needs food) in Berhampore, and if I'm not talking revolving credit accounts I can be found running the trails of Wellington.

‍