To Hedge or Not to Hedge? Tips in minimising interest rate rise risk

The recent higher than expected inflation data has prompted the RBA to modify its interest rate view. Last month, the Bank abandoned its earlier strategy to seek to control fixed rates. Therefore, the past few weeks has seen fixed rates across most banks increase significantly with few, if any, opportunities to lock in rates at the previous ultra-low sub 2% level.

While this is disappointing for borrowers seeking to access these low-rate products, some opportunities remain to secure rates at moderately low levels.

What can we expect over the next few months

For the past year or two, low fixed rates have represented great value for borrowers, as they often provided an interest cost less than the ruling variable rate. However, this situation has now turned on its head, with fixed rates, as distinct from variable rates bearing the brunt of the recent increases. Thus, the opportunity for borrowers has now shifted to become a threat, with the risk that variable rates will likewise follow the upwards trajectory of fixed rates sometime in the near future. In this context, borrowers sitting on large variable rate exposures should turn their minds to how to hedge that position.

Whilst reasonably low fixed rates are still available, now is a good time for borrowers to look at how they might hedge their interest rate exposure by considering a fixed rate on all or perhaps part of their loan.

Pressure mounting on banks to increase variable rates

More than half of all home loan customers in Australia have a variable interest rate loan. Notwithstanding that the RBA has still not changed its variable cash rate, with pressure mounting on banks to increase rates, variable rate customers could face increased interest costs in the future.

Lock in a low fixed interest rate whilst you still can

In an environment of increasing rates, it is easy for lenders to pursue an increase in market share by competing at the variable rate level, knowing that they then remain free to increase customer rates down the track. Therefore, even though fixed rates have increased, borrowers would be well advised to consider locking in a fixed rate while some relatively cheap product offerings remain available.

If you have any questions regarding this article or are seeking financial advice, our experienced Lending Solutions team at Morrows can provide you with a range of support fit to your needs. Get in contact with Morrows Lending Solutions today!