Win-win for homeowners
Tuesday, September 27, 2011 at 1:10PM September 26, 2011, 3:41 pm Yahoo!7
While some fixed mortgage rates look like seriously good value at the moment, the big end of town appears to be getting ready for a 0.50 per cent official rate cut by November.
Homeowners who haven’t woken up to the bargain mortgages currently on offer should take a look right now. There’s a price war in full swing as the banks try and kick-start the flagging lending market - and almost everybody could benefit.
While the big four are offering standard variable rates of between 7.70 - 7.80 per cent, the discounts that they are prepared to offer have soared from an average of 0.70 per cent to as much as 1.20 per cent.
In effect, the banks have pre-empted any cut by the Reserve Bank and slashed their best mortgage rates by an extra 0.50 per cent.
But it’s not just buyers that qualify – anybody who contacts their bank demanding to have the best rate is likely to get it, so if you’re paying above 7 per cent, get on the phone and start haggling.
The million dollar question (as ever) is whether to go fixed or variable.
Right now is one of those rare windows of opportunity where fixed rates look like seriously good value. Take a look away from the big four and you’ll find credit unions and building societies offering 3-year fixes for as little as 6.35 per cent. That’s nearly 1.5 per cent below the big four’s typical SVR.
But here’s the conundrum: given that you could negotiate a variable rate of between 6.5 per cent and 7 per cent, it’s also tempting to look at these variable deals and wait for some very likely rate cuts by the Reserve Bank. Then you could be paying even less.
Astonishingly, since the turmoil on global stock markets last week, the big end of town is now pricing in a 100 per cent chance of a 0.50 per cent cut to the official cash rate by November.
Looking further out, the markets are also pricing in almost 1.50 per cent worth of cuts to the cash rate over the next 12 months. That would take the cash rate down to just 3.25 per cent.
Now, personally I think that’s an over-reaction. We’ll have to see GFC-style conditions prevail for aggressive cuts of that magnitude. And I’m still hopeful that can be avoided.
But having said that, there is a very good chance of a rate-cut or two over the coming months, so it may well make sense to hedge your bets and split your loan, 50 per cent fixed and 50 per cent variable.
It’s a win-win situation. You’re locking part of your loan into a historically low rate and getting a very good value variable-rate deal on the other half. If rates fall, you win. If they stay the same, you’ve still reduced your costs by refinancing. And if they go up, you’ll have mitigated the impact by fixing half of your loan.
One potential catch to bear in mind: even if the RBA does cut rates, it’s by no means certain that homeowners or businesses will feel all of the benefit.
By mid-last week, the cost of borrowing on international markets had increased by about 60 per cent in the three months since June.
It is exactly this type of upwards funding pressure that persuaded the big four banks to embark on “out of cycle” rate hikes back in 2009 and, more recently, for the Commonwealth Bank to nearly double last November’s 0.25 per cent cash-rate hike, raising its mortgage rates by 0.45 per cent.
While banks say they have enough money for the time being, they will have to return to the markets and raise more capital at some point next year. And the way things are going they will have to pay substantially more for that money than the debt they are rolling over. That is a cost that they have traditionally passed onto borrowers, either by raising rates or failing to pass through the RBA’s cuts.
It will not be popular with the politicians, but it won’t be the first time the banks have upset the government.
But I reckon it’s foolish to look a gift horse in the mouth. Given the great deals out there at the moment, I suggest you grab them while you can. Give yourself some peace of mind, but don’t be too surprised if your bank doesn’t pass through any upcoming rate cuts in their entirety.
