Don't Be Caught
Sydney Morning Herald
Wednesday March 19, 1997
WHEN borrowers start questioning whether or not they should refinance their two-year 7.95 per cent loans (and yes, it is happening) you know that one of two things is happening. Either competition has created a borrowers' bonanza where it is financially worthwhile to "reshop" your loan every one or two years, or interest rates have hit historical lows.
In Australia, at the moment, both of these factors are having an influence.
But the $64,000 question is, how long will it last?
With the latest round of rate cuts in the home-loan sector, speculation has now turned to the viability of the non-bank lenders. As has been well-documented, these lenders have been able to snaffle big business from the banks over the past couple of years by undercutting the banks' historically high loan "margins". With the latest rate cuts, however, the banks have slashed their margins to highly competitive levels, making it harder for the non-bank lenders to undercut them and make a profit.
Also, economic and market uncertainty in the US appears to have put a floor under Australian interest rates for the moment. From 6.7 per cent in mid January, the yield on five year bonds has risen to around 7.45 per cent putting pressure on longer term interest rates.
Over the past few weeks, several lenders have been cautiously lifting their fixed interest lending rates. Advance, BankWest and St George have all lifted their five-year fixed mortgage rates by 0.25 per cent, according to the interest rate research company, Cannex. Citibank has lifted its five-year rate by 0.3 per cent, FAI by 0.45 per cent, and RAMS by 0.1 per cent.
This is hardly earth-shattering stuff. But any steepening of the interest rate yield curve makes it harder for borrowers to lock into attractive longer-term rates when short-term rates rise. (The yield curve graphs short-term interest rates against longer-term rates. A steep yield curve means longer-term rates are much higher than short-term rates.)
At present, there is a 1 to 1.5 per cent "penalty" in choosing a three- or five-year fixed interest rate over the floating or variable rate. This means interest rates will have to rise by at least that much for the fixed rate to be a better option.
While the economy remains sluggish, there is little likelihood of this happening. But borrowers who don't want to be caught napping by any interest rate rise should not ignore these early warning signals - particularly if they become more sustained and widespread.
© 1997 Sydney Morning Herald