Shorter fixed term mortgage rates preferred

Shorter fixed term mortgage rates preferred

Hands, ruler, person measuring and drawing with pencil

Each month I run five surveys which deliver coalface insights into what is happening with the residential real estate market from the point of view of agents, mortgage advisers, consumers, portfolio investors, and property investors. I can also see in near real time what is happening with spending on things like home renovations, cars, groceries, and travel.

What are the results saying?

One of the findings from my recent survey of real estate agents is that for the first time since the survey started agents report rising interest rates to be the biggest concern which buyers have. Six months ago, 66% of agents said that the biggest concern of buyers was a lack of listings. Now, only 9% say that.

Six months back 46% said access to finance was the major problem, and now 78% say that. This change reflects the impact of tightened LVR rules and the altered credit contracts legislation. The other change is that back in October 52% of agents said interest rate worries were dominant. Now 81% say that.

It is easy to see why. Back in October the one year fixed mortgage rate was around 3.2%. Now it is typically near 4.5%. The three year rate has shifted from 3.9% to 5.4%.

As a result of these rate shifts, from my monthly survey of mortgage advisers I can see that the favourite term to fix at cited by 74% of advisers is two years. Back in October that term was favoured by just 20% of borrowers. 22% of advisers report people most favour fixing for three years compared with 77% back then.

So, over a period of six months there has been a distinct shortening of the time period which people prefer to fix at. This is why I sometimes struggle to remain polite when journalists ask me if the rising rates environment means now is a good time to fix for a number of years in order to avoid future rate rises. No, it is not the right time.

The right time was up until April last year when a borrower could fix for five years at 2.99% and at that time I heavily favoured doing so. Very few people did in fact forsake the slightly lower rates on shorter terms for what now in hindsight to many will look like an absolute gift rate.

We are now at an interesting stage.

The Reserve Bank is going to take interest rates higher and the relative cost of fixing one and two years will move up more than for other terms. The question then becomes one of whether to keep fixing two years or to shift to the higher one year rate in expectation of riding interest rates lower when they start falling.

The problem there is that we don’t know when mortgage rates will commence their journey back down again. My current pick is sometime in 2024. But in a world of complete lack of knowledge regarding the impact of Russia’s invasion of Ukraine, the length of time China continues to pursue a failed covid management policy, and whatever other shocks are set to come along, predictability of interest rate movements is quite low.

The challenge for many is probably not going to eventually be fixing one year or two.

It will be not fixing five years when the yield curve slope goes inverse, and the long rates are lower than short rates. We may hit that point late this year. In 1998 and 2008 a lot of people fixed for five years because those rates were slightly cheaper than short rates. But they lost out as the rates subsequently fell away very rapidly.

Hopefully this time around not many people make the mistake of fixing long term at precisely the wrong point in the interest rates cycle. Keep that in mind for late this year.

To sign-up to either my free weekly Tony’s View publication, or weekly Tview Premium plus extras, go to

How does this impact me?