During the pandemic, Australian borrowers have had access to some of the lowest fixed rates on record. But in recent months, lenders have quietly pulled these offers from the market.

Currently, the average 2-year rate is 2.94% pa (vs. 2.31% pa a year ago), while the average 5-year rate is 3.88% pa (vs. 2.62% pa before a year).

Because banks are proactive in setting their interest rates, they tend to provide an indication of where the broader interest rate environment is headed. When fixed rates go up, it’s because banks believe the prime rate will go up in the near future.

Today, all major banks agree that the Reserve Bank of Australia will hike rates at least once this year – the only question is when the tightening cycle will start.

The NAB is betting that improved jobs numbers will raise RBA rates by 0.15% in August and again by 0.25% in September and November. This would mean that the key interest rate would be 0.75% at the end of the year.

But that only partially explains why so many of the best fixed-income offerings have disappeared in recent months.

RBA support helped keep fixed rates low

To understand why fixed rates are rising so rapidly right now, we have to consider why lenders were able to get them to such lows in the first place.

Back in 2020, the Reserve Bank of Australia cut official interest rates three times and introduced a range of measures to protect the economy from the fallout from the pandemic.

One of these measures was the Term Funding Facility (TFF). This supported fixed interest rates of up to three years by making large amounts of financing available to banks at a reduced interest rate.

The TFF ended in June 2021, but while it was available, banks received more funds than they needed, allowing them to keep interest rates low beyond the expiration date.

When the cheap money finally ran out, fixed rates quickly returned to pre-pandemic levels. The table below shows how the average fixed rate has changed over the past year for the lenders we track.

Average Fixed Rates (OO, P&I) – changes over 12 months

Pressure also comes from overseas

But the pressure banks are currently feeling to raise their fixed interest rates isn’t just coming from Australia.

Around the world, excessive inflation has created a nightmare scenario for central banks caught between either raising interest rates (and a potentially slowing economic recovery) or allowing prices to rise further.

While the RBA has steadfastly refused to raise interest rates, its central bank peers have been far more nervous about runaway inflation.

On the other side of the Tasman Peninsula, the Reserve Bank of New Zealand has hiked rates three times since October. The Bank of England has hiked interest rates twice and the US Federal Reserve is poised to follow suit in the coming months.

“Australian banks get some of their funding from abroad, particularly from the US. So when central banks around the world raise interest rates, our banks have to pay more for those funds,” said Peter Marshall, banking expert at Mozo.

RELATED: Will Rates Rise in 2022?

So should I set my interest rate on the home loan?

Current economic conditions – in Australia and abroad – have presented borrowers with difficult choices.

While variable rates might look like the better deal right now, lenders can always increase them once cash rates rise.

And while fixed rates can protect borrowers from rate hikes, they come with certain downsides (like fewer features and restrictions on special repayments).

If you can’t decide between the two, you can opt for a split home loan. This involves splitting your loan into two accounts – one fixed and the other floating.

The size of each account is up to you. For example, if you took out a $500,000 loan and decided to freeze 60% of it, the interest you pay on $300,000 will remain the same for the duration of the fixed term.

For more information on mortgage and lending trends, visit our home loan statistics page. And if you are looking for a home loan, visit our home loan comparison page or browse the selection below.

^* WARNING: This rate of comparison applies only to the example or examples provided. Different amounts and maturities lead to different comparison rates. Costs such as withdrawal fees or prepayment penalties and cost savings such as fee waivers are not included in the settlement rate, but may affect borrowing costs. The comparative interest rate shown is for a secured loan with monthly principal and interest payments of $150,000 over 25 years.

^** The initial monthly repayment numbers are estimates only, based on the advertised interest rate, loan amount, and entered term. Rates, fees and charges, and therefore the total cost of the loan, may vary depending on the loan amount, loan term and credit history. Actual repayments will depend on your individual circumstances and changes in interest rates.

^See information on the Mozo Experts Choice Home Loan Awards

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