Why are fixed rates going up right now?

Woman wearing mask managing mortgage on phone.

Throughout the pandemic period, Aussie borrowers have had access to some of the lowest fixed rates on record. But in the past few months lenders have been quietly removing those offers from the market. 

Right now, the average 2-year rate sits at 2.94% p.a. (up from 2.31% p.a. a year ago) while the average 5-year rate sits at 3.88% p.a. (up from 2.62% p.a. a year ago).

Since banks look forward when setting their fixed rates, they tend to indicate where the broader interest rate environment is heading. If fixed rates are going up, it’s because banks believe the cash rate will rise in the near future.

These days, the major banks all agree that the Reserve Bank of Australia will lift rates at least once this year — the only question is when the tightening cycle will begin.

NAB is betting that improved jobs figures will see the RBA hike rates by 0.15% in August and again by 0.25% in both September and November. This would leave the cash rate sitting at 0.75% by year’s end.

But that only partly explains why so many of the best fixed rate deals have disappeared in the last few months.

RBA support helped keep fixed rates low

To understand why fixed rates are climbing so quickly right now, we need to consider why lenders were able to take 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 raft of measures to safeguard the economy against fallout from the pandemic.

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

The TFF was retired in June 2021, but while it was available banks got their hands on more funding than they needed, allowing them to keep rates low beyond its expiration date.

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

Average fixed rates (OO, P&I) — Changes over 12 months

TermAverage rates in March 2021Average rates in March 2022Difference
1-year2.33% p.a.2.63% p.a.0.30%
2-year2.31% p.a.2.94% p.a.0.63%
3-year2.34% p.a.3.36% p.a.1.02%
4-year2.37% p.a.3.75% p.a.1.38%
5-year2.62% p.a.3.88% p.a.1.26%

Pressures also coming from overseas

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

Around the world, excessive inflation has created a nightmare scenario for central banks, who are caught between lifting rates (and potentially slowing economic recovery) or letting prices drift up further. 

While the RBA has steadfastly refused to lift the cash rate, its central bank peers have been much more jittery in the face of runaway inflation.

Across the Tasman, the Reserve Bank of New Zealand has already lifted interest rates three times since October. The Bank of England has raised rates on two occasions and the US Federal Reserve is poised to follow suit in the coming months too.

“Australian banks get part of their funding from overseas, particularly the US, so if central banks around the world raise their rates, our banks will have to pay more for those funds,” said Mozo’s banking expert Peter Marshall.

RELATED: Will interest rates go up in 2022?

So should I fix my home loan rate?

Current economic conditions — in Australia and abroad — have left borrowers with some difficult decisions to make. 

While variable rates might look like the better deal at the moment, lenders can raise them at a moment's notice once the cash rate goes up.

And though fixed rates can protect borrowers against interest rate hikes, they have certain drawbacks of their own (such as fewer features and limits on extra repayments). 

If you’re unable to decide between the two, you might opt for a split home loan. This involves dividing your loan into two accounts — one fixed and the other variable.

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

For more information on mortgage and lending trends, visit our home loans statistics page. And if you’re in the market for a home loan, visit our home loan comparison page, or browse the selection below.

Home loan comparisons on Mozo - last updated 13 August 2022

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* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

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