Negotiating The Mortgage Maze
Sydney Morning Herald
Saturday March 2, 1996
The deregulated mortgage market means consumers can now shop around for the best home loan deal. And, according to PHILIPPA TYNDALE , what makes a deal good is how well it suits the individual.
WITH fixed interest rates now, in most cases, lower than variable rates, many mortgagees will be asking the question: should I lock in my mortgage today or take a punt on the floating rate?
Rates such as State Bank NSW's 7.25 per cent, fixed for one year, or ANZ's special two-year fixed rate of 8.69 per cent are tempting beside floating rates of between 8.85 per cent and 10.50 per cent.
In most cases, even four- and five-year fixed rates have slipped below the variable rate. For example, the five-year fixed rates for the Commonwealth, National Australia and St George banks are currently all 9.75 per cent, compared with their variable rates of 10.5 per cent.
There is no clear-cut answer to the question of whether to fix or float, unless you have an extraordinary insight into the future movements of bond markets and cash rates and can be assured of your timing in the interest rate cycle.
Factors such as the nature of your cash flow and need for security are equally as relevant to your decision on whether to elect fixed interest over a variable rate.
"Fixed interest is preferable if you are concerned about your ability to pay monthly payments if the rates go up," says Mr Andrew Willink, managing director of the research firm, Cannex.
The biggest plus for locking into a fixed rate for one to five years is that you can eliminate the interest risk for that period. Repayments are predictable and, if floating rates go through the roof, you are protected.
For the owner-occupier who is stretched to the limit on a mortgage, a fixed rate might act as insurance that they won't be pushed beyond their budget. For the investor, removing interest rate risk is usually a sound business decision.
If you are considering fixing your mortgage, now is not a bad time to do it, according to Macquarie Bank economist, Mr John Kyriakopolous.
"Fixed interest loans are very good value at the moment," he says. Macquarie is not anticipating a rate change in the near future.
On the other hand, if you are likely to be in a position to make extra repayments along the way, and need some flexibility, it would be unwise to shackle yourself to a loan that involves high penalty rates (some as high as six months of interest payments) for getting out early.
"At the end of the day, the interest rate isn't the only thing people should be looking at. People should shop around and look at all their options, including fixed and variable rates and combined loans," says Advance Bank's spokesman, Mr David Brown.
If you do decide on fixed-rate borrowing, there is the decision of tenure: how long to fix the rate for. Mr Willink recommends two years as a reasonable time frame, because "one can plan out to about two years in one's life and after that it's a guess".
"When you're talking about fixed rates for three to five years, you're talking about either protection or a punt that rates will go up further," Mr Willink says.
If you're not sure whether to go fixed or floating, and you want to take an each-way bet, there is always the split loan. The borrowing is divided between fixed and variable, so there is still the possibility of early repayments and your mortgage is not entirely exposed.
"With a split loan, you're going to be half right," says Mr Willink.
The chief economist at Bain and Company, Mr Don Stammer, also recommends the split loan as the safest course to take if you want a predictable burden on your housing rates.
He believes the variable rate will not rise significantly before 1997, and predicts that it may even come down, because of competition between lenders.
By locking into a straight fixed interest rate, you are also excluding yourself from the wide range of features now on offer for variable rate loans. These include cheap introductory rates, such as Westpac's "honeymoon" rate of 7.9 per cent, capped for one year, and redraw facilities, which allow you to make additional payments but still have access to the money if you need it.
Every week lenders are coming up with new twists on the home loan, and the others soon follow with similar products.
"The market is moving very fast," says Citibank's Mr David Hollott. "It's no longer a market where one lender stands out, as any new products are quickly copied."
For example, Citibank was the first to offer a "portable" mortgage that can be transferred if you move house, without having to refinance. Others have been quick to follow. Advance Bank is the first on the market with a renovation loan which is offered at the variable discount housing rate of 7.75 per cent, capped for 12 months, as opposed to personal loan rates of between 12 and 13 per cent.
"A lot of lenders are giving flexibility to their variable loans," according to the national lending services manager at Mortgage Choice, Mr Bill Rankin. "There is a big choice in the design of loans."
All this choice can be a bit dazzling to the poor consumer.
"The difficulty is weighing up what is going to be the lowest cost loan over the long term, when all that is being thrown out is the interest rate," says Mr Rankin. The need to sort through the options has spawned a market for mortgage introducers, like Mortgage Choice, who will sit down and walk you through different products. Mortgage Choice has arrangements with 16 different lenders to write home loans, and its fees are paid by the banks if a loan is approved.
According to Mr Rankin, people need to take care at the start to establish all the set-up costs and terms and conditions, particularly in relation to interest rates at the end of the introductory period.
One danger is that mortgagees become enamoured with the thought of low "honeymoon rates" and forget to prepare themselves for the marriage.
For example, at today's rates, the Westpac 7.9 per cent introductory rate would suddenly jump to 10.5 per cent at the end of the first year.
Citibank has always had a problem with introductory rates because of the shock that mortgagees face when the honeymoon period is over, and has only recently offered them.
The deregulated mortgage market is a long way from the days where you only got a loan if you had a long-standing relationship with a bank. These days, banks fully expect you to hunt around for a good deal and are more open about offering discounts.
However, Mr Rankin warns against false economies.
"Some people get too caught up in negotiating an extra $100 off the up-front fee and opt for a loan that is nowhere near the best overall.
"The most important thing is overall cost and interest rate isn't the only thing," he says.
He gives the example of the MLC Home First redraw loan, which allows people to pay their salary into the mortgage. At an interest rate of 10.25 per cent, a 25-year loan can be brought down to just seven years through additional repayments, says Mr Rankin.
At an interest rate of 12 per cent, it is seven-and-a-half years. "Was the interest rate or product design more important?" he asks.
Now, the big factor in the mortgage market is competition. In the past year, mortgage originators such as Aussie Home Loans have claimed a 10 per cent share of new residential loans. This has forced the large banks to meet the lower rates or risk further losses in market share.
The major lenders aren't taking the arrival of mortgage originators lightly. One of them, St George Bank, has just rolled out a product in Queensland called "Basics Variable" with a rate of 8.9 per cent. The product is aimed at matching Aussie Home Loans rates and the bank makes no bones about the fact it that is preparing for a battle over market share.
"It is designed to take market share and take them head on," says a spokesman for St George, Mr Adam Cook.
INSTITUTION INTEREST RATES INITIAL
Variable 1yr 2yr 3yr 4yr 5yr FEE
Advance 10.50 7.75 8.95 9.25 9.75 9.90 $600
AIDC 9.40 9.55 9.70 8.95 9.95 10.15 -
ANZ 10.50 7.95 8.69 9.19 9.69 9.69 $600
Aussie Home Loans 8.90 n/a 9.50 9.50 9.75 9.90 $600
Aust Mort Corp 8.95 n/a n/a 9.50 n/a n/a $500
BMC Mortgage 8.85 9.95 10.10 9.85 10.45 10.55 $739
CHS Home Loans 9.05 n/a n/a n/a n/a n/a $545
Citibank 9.20 7.75 10.50 9.75 10.50 10.50 $750
Commonwealth 10.50 7.90 8.95 9.25 9.75 9.75 $600
Endeavour Credit Union
9.75 7.20 7.20 n/a n/a n/a $185
FAI First Mortgage 8.80 n/a n/a 9.45 n/a 9.75 $700
GIO 9.95 9.35 9.60 9.80 10.00 10.30 $600
Illawarra Mutual BS 10.50 7.75 8.95 9.40 9.95 9.95 $600
Metway Bank 10.50 7.90 8.95 9.25 9.65 9.65 $610
MLC BS 9.95 8.95 8.95 9.25 9.75 9.75 $600
NAB 10.50 7.90 8.75 9.45 9.75 9.75 $250
NatMut Life 9.25 n/a n/a n/a n/a n/a $500
Police CU (NSW) 9.25 n/a n/a 10.11 n/a n/a $475
RAMS Mortgage Fin 9.45 n/a n/a n/a n/a n/a $500
St George Bank 10.50 7.90 9.25 9.25 9.65 9.75 $600
State Bank (NSW) 10.50 7.25 8.95 9.35 9.70 9.70 $600
Sydney CU 10.25 n/a n/a n/a n/a n/a -
Westpac 10.40 7.95 8.95 9.50 9.90 9.90 $750
SOURCE: Cannex
© 1996 Sydney Morning Herald