Unless you’ve been stuck in the north pole feeding Rudolf, you’d no doubt be aware that yet again mortgage holders are amid an out-of-cycle rate increase with the major banks raising rates (mostly) for investors by 0.08% - 0.2%.
No surprise that owner-occupiers have (mostly) been spared this rate hike… bad PR to eat into stretched household budgets in the mortgage belt during the festive season.
With a 73% share of the current home finance market, when the Big 4 move on rates it flows down to smaller funders including the non-banks, and not just because these non-bank funders are themselves typically warehouse funded by the major banks.
Each time rates change; the retrospective fixed vs variable decision of a mortgage holder is tested.
For fixed rate holders (whose rates are typically higher), the initially offered variable rate not increasing higher than their fixed rate by no later than the mid-point of their fixed period means that they’d have paid more for their finance than could have – not a happy outcome.
Theory alone would suggest that a variable and a fixed rate offered at a point in time by a funder would be scaled to ensure a zero-sum outcome between these, given the funder’s cost price expectation out to the end of the fixed period.
As such, the decision to fix the rate (or not) determines who carries the risk of unexpected funder cost price changes over the fixed period.
Given the sophistication of current risk price modelling, such unexpected changes are typically high impact, very low frequency events such as the GFC or – dare we say it – the Commonwealth losing its AAA sovereign risk rating.
MCCA’s Ijarah home finance products offers a full range of fixed and variable options.