Should borrowers fix their mortgage before rates rise again?

Nervous homebuyers and refinancers weighing up their options for a fixed-rate mortgage face a much harder call as the threat of further interest rate hikes by the Reserve Bank through the rest of the year build.

Markets are pricing in about a three-in-four chance of a 0.25 percentage point increase in the cash rate when the RBA board meets on Tuesday, after back-to-back hikes in February and March pushed it back to 4.1 per cent.

Another move would take the rate to 4.35 per cent, adding more pressure to borrowers who had only recently started to feel relief from last year’s cuts.

The renewed rate-rise risk follows a hot inflation read. Headline inflation jumped to an annual rate of 4.6 per cent in March, up from 3.7 per cent, driven heavily by electricity and soaring fuel prices.

For borrowers, the question is not simply whether rates will rise again, but if paying for certainty now is worth the risk of being locked in later.

A rate rise this week would add another $91 a month to repayments for a borrower with a $600,000 mortgage and 25 years remaining on their loan, according to Canstar modelling.

Across the February, March and potential May hikes, repayments for the same borrower would be up $272 a month.

Canstar data insights director Sally Tindall urged borrowers to test their budgets against further increases, including Westpac’s outlier forecast for three more cash rate hikes.

“While this prediction is still an outlier, it’s better to be overcooked on the mortgage than underdone,” Ms Tindall said.

For borrowers who want predictability, that makes fixed rates tempting. But the numbers are not clear-cut.

Canstar tested whether borrowers had already missed their chance by comparing some of the cheapest fixed and variable loans available.

On a $600,000 owner-occupier loan over 25 years, variable still wins if the RBA stays on hold, with borrowers paying about $1558 less interest over the next year.

Variable also remains slightly ahead after one 0.25 percentage point hike, saving about $187.

Fixing starts to pay off if the RBA moves twice. Under a May and June hike scenario, a borrower on a one-year fixed rate would be about $1058 better off over the year. If rates rise three times — in May, June and August — the saving grows to about $2052.

The window may also be narrowing. Canstar said four lenders lifted 48 variable rates by an average 0.1 per cent last week, while 16 lenders raised 315 fixed rates by an average 0.20 per cent.

The lowest one-year fixed owner-occupier rate on Canstar’s database is 5.74 per cent, from Transport Mutual Credit Union. The lowest two-year fixed rates start at 5.89 per cent, while the lowest three-year rate is 5.84 per cent, offered by Police Bank for first-homebuyers.

Bianca Patterson, broker and director of Calculated Lending, said borrowers usually considered fixing for two main reasons: fear of further rate rises and the need for repayment certainty when cash flow was already tight.

That could include households expecting a temporary drop in income, Ms Patterson said, such as while studying, taking parental leave or starting a family.

“There isn’t really a right time generally as everyone’s circumstances are different,” Ms Patterson said.

But fixed rates also come with trade-offs such as no offset accounts and restricting extra repayments during the fixed period.

Another risk is the cost of getting out early. Ms Patterson said borrowers who refinance, sell their property or pay out the loan before the fixed term ends may face break costs, which can be significant.

Robert Flynn, a Perth-based mortgage broker from Vorteil Financial Group, said those costs were difficult to predict because each lender used its own calculations.

“I’ve seen people with break costs at tens of thousands of dollars and I’ve seen people with break costs at zero,” he said.

That uncertainty is one reason many borrowers are asking about fixed rates without necessarily choosing them.

“People are certainly having more conversations about it, in pursuit to get a better rate,” Mr Flynn said. “But uptake on fixed rates is still quite low when they consider the whole picture.”

For Mr Flynn, the discussion often shifts quickly from chasing the lowest rate to working out how much uncertainty a household can live with.

“A rate-driven conversation usually becomes a risk conversation around budgeting certainty versus flexibility,” Mr Flynn said. “It’s why it’s critical to discuss this with a broker to consider your circumstances.”