Buyers rush for fixed rate home loans

THE proportion of mortgages with fixed rates has increased fourfold in the past two years amid ongoing uncertainty over interest rates.

Exclusive analysis carried out for The Australian by online rates tracker RateCity.com.au shows that customers are increasingly choosing fixed over standard variable rates.

Major banks have been offering three-year fixed loans, the most popular type, at rates up to 100 basis points cheaper than their standard variable loans.

The differential is explained by the fact that banks fund fixed-rate mortgage with longer-term debt that is cheaper than short-term debt.

RateCity found that the proportion of new loans with fixed rates had increased from 3 per cent in May 2010 to 12 per at the end of February.

The Reserve Bank is set to cut the official cash rate from 4.25 per cent to 4 per cent next week to stimulate the national economy.

Economists said rates could be cut again in June after persistent warnings from the large banks that future rate cuts were unlikely to be passed on to customers in full.

The likelihood of lower rates has driven Australian bond yields to their lowest level in more than six decades.

RateCity chief executive Damian Smith said customers wanted to lock in rates because the future direction of interest rates was unclear.

"Because long-term money is relatively cheaper at the moment, the banks have been able to offer very aggressive fixed rates in the past year," Mr Smith said.

"There is about a 50 basis points difference in the average fixed and variable rates once discounts are taken into account, which is a reasonable gap by historical standards."

National Australia Bank mortgages general manager Sally Bruce said the increased demand was caused by fixed rates being lower than variable rates.

"We are seeing a similar trend at NAB to the industry trend, with volumes up by three or four times compared to two years ago," Ms Bruce said.

"There are times in the cycle when fixed rates are lower than variable rates.

"Typically, demand for fixed rates increases in these times."

Commonwealth Bank executive general manager, retail products Michael Cant said customers increasingly were keen on fixed rate mortgages. "If you compare the standard variable rate with a package discount of 70 (basis points) and a two-year fixed rate also with a package discount, the fixed rate at the moment is an attractive option for borrowers," Mr Cant said.

RateCity's Mr Smith said demand for fixed rates had grown even though some homeowners who had locked in their loans had been burned at the start of the global crisis when the Reserve Bank ordered a string of rate cuts.

"Until 2008 people had made the assumption that rates were going to keep rising," he said. "But rates started to plummet, which took variable rates down. People who took fixed rates in 2008 were then up to 300 basis points worse off by 2009. The emergency rate cuts really hurt people."

Source: The Australian

Fixed rates: Don't wind up in a bind

Borrowers should be cautious about taking a fixed-rate home loan now.

The rush of borrowers towards fixed-rate loans at a time when official interest rates have started to fall has Australia's credit ombudsman worried.

With one interest rate cut in the bag, Ombudsman Raj Venga has urged borrowers to carefully consider the implications of locking in a home loan rate - in particular, the possible ''break cost'' if they discharge the loan early to refinance or sell.

Housing finance data released last week showed that fixed-rate loans jumped from 5.6 per cent of all loans in August to 7.9 per cent in September as unusually cheap fixed rates enticed borrowers.

But Venga, who handles complaints about non-bank lenders, says although fixed rates are often seen as a way of reducing the risk of rising interest rates, ''borrowers should be aware that they may incur substantial break costs in a falling interest rate environment.''

In the past, fixed-rate loans have resulted in a spike in complaints when variable rates later drop significantly and people try to refinance.

While exit fees have been banned on variable-rate loans, lenders can still charge break costs on a fixed-rate loan to recover the amount they'll lose if the borrower leaves early.

If rates are falling and the financier has to re-lend the money at a lower rate, they're entitled to recompense. The more rates fall, the higher the break cost.

''Break costs can and do sometimes run into tens of thousands of dollars,'' Venga says.

They might be payable if the loan is refinanced or discharged within the fixed-rate period, possibly because the property is being sold; if additional funds are sought, which would require the existing loan to be discharged; and if a lump-sum repayment is made during the fixed-rate period (though some lenders allow you to prepay up to $10,000).

Before signing a contract, borrowers should seek advice on how any break costs would be calculated, Venga says.

If you're already on a fixed-rate loan and are thinking about refinancing, ask first for an indicative payout figure, making sure this includes any break cost. Remember that this payout figure might change if you don't act straight away.

Those who fixed in August and September won't have cause for regret yet. The typical fixed rate was 6.6 per cent to 7 per cent then and even after the recent rate cut the average big-four variable rate is 7.55 per cent - though some people qualify for discounts of 0.5 to one percentage points.

However, those who locked in about 8 per cent in November 2007 - when fixed-rate loans hit a record 24 per cent of all borrowing - know how costly it can be if you need to break a loan early when rates are falling.

A year after they fixed, the global financial crisis hit and rates plummeted, sending break costs soaring.

Key points

❏ Fixed-rate loans should be used for certainty not as a ''bet'' on interest rates.

❏ Break costs can be hefty if you exit early when rates are falling.

❏ Selling or refinancing may incur a break cost.

❏ Extra repayments or loan top-ups can also trigger break costs.

SMH

Ombudsman serves caution on fixed rates

Fixed rates are attractive to many borrowers, but the break costs can bite you if you need to sell or refinance your property before the fixed term is up.

In the wake of the Reserve Bank rate cut, COSL has urged caution for borrowers considering fixed rates.

Credit Ombudsman Raj Venga has warned borrowers to be wary of break costs on fixed rate home loans. Venga said COSL has, from time to time, experienced a "surge in complaints" from fixed rate borrowers locked into loan facilities while variable rates drop.

"Although fixed rates are often seen as a way of reducing the risk of rising interest rates, borrowers should be aware that they may incur substantial break costs in a falling interest rate environment. Break costs can and do sometimes run into tens of thousands of dollars," Venga said.

Venga cautioned fixed rate borrowers to ask their lender for an indicative pay-out figure including break costs, and to be aware that the figure could change over time, depending on when the loan was paid out. He said borrowers should "weigh up carefully" whether or not to chase a lower variable rate in light of fixed rate break costs.

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