Locked In
Sydney Morning Herald
Saturday January 17, 1998
When choosing which loan best suits, borrowers should first recognise their many different features, writes SEAN AYLMER.
A FEROCIOUS war between home-loan lenders is pushing fixed mortgage rates down to their lowest levels in 30 years, but analysts believe there is no guarantee that locking into a fixed-rate loan will work out cheaper in the long run.
After 18 months of falling variable rate loans, lenders are cutting fixed-interest rates in an effort to grab a greater share of the lucrative $180 billion home loan industry.
And the winners are home buyers and people wanting to refinance their loans.
For borrowers, many three-year fixed rates are now below the standard variable rate, and locking in is an enticing option.
Commonwealth Bank's three-year rate of 6.55 per cent is actually below the bank's standard variable rate of 6.80 per cent. In other words, variable rates would have to fall by at least one percentage point in the next three years for the variable rate to provide a better deal.
The lowest five-year fixed home loan rate on the market is Super Members Home Loans's 6.9 per cent offer. This is just 0.8 per cent above the lender's standard variable rate of 6.1 per cent and just 0.1 per cent above that of most banks.
Super Member Home Loans offers the lowest one-year rate of 6.10 per cent. Residential Housing Corp, an independent mortgage manager, has the best variable rate in the country at 5.89 per cent.
Borrowers only benefit from locking into a rate if the fixed rate is less than the average standard variable rate charged over the fixed-rate period.
For example, Super Members Home Loans's 6.9 per cent, five-year fixed rate loan is only worthwhile if over a five-year period, the lender's standard variable rate averages more than 6.9 per cent.
Similarly, Commonwealth Bank's three-year 6.55 per cent offer will work out better only if the bank's standard variable rate averages more than 6.55 between now and 2001.
In other words, if variable rates rise sufficiently, locking in now is an attractive option. If they fall, the borrower could lose out.
Economists are paid hundreds of thousands of dollars to predict exactly what official interest rates and standard variable rates will do. Some expect them to rise by 1 per cent within a year while others expect them to fall by the same amount.
In a recent Sydney Morning Herald poll of economists, the median forecast was for no change in standard variable mortgage rates this year.
It showed that no-one can confidently predict what interest rates will be in a year, let alone three or five years. So taking out fixed-interest rate loans involves taking a punt on rate movements.
Anecdotal evidence suggests borrowers are increasingly prepared to take that punt, with up to one-quarter of them locking in to low fixed-interest rates. This is well above the 10 per cent figure of three months ago.
Australia's biggest home lender, Commonwealth Bank, more than doubled its fixed-rate lending volumes during November and December. The last month of 1997 was the bank's busiest ever December, with fixed-rate loans making up the largest portion ever.
The Commonwealth's assistant general manager of personnel banking, Mr Adrian Cosenza, said: "People are taking the view that interest rates have bottomed. Many economists predict rates are likely to rise in the latter half of 1998."
He said the impetus for the increase came from a five-year, 7.25 per cent offer in the six weeks before Christmas.
Mr Cosenza said three- and five-year rates were most popular.
About 20 per cent of ANZ Banking Group's loans in December were based on fixed rates. This was almost three times the level of five months earlier. Other lenders have also reported a rise in fixed-rate lending.
Analysts said the rush on fixed-rate loans reflected the lowest fixed rates in 30 years.
Lenders price fixed-term loans on the basis of market interest rates, or bond yields. The meltdown in Asia and fears about global equity markets has pushed bond yields to their lowest level since the 1960s.
Another factor which has helped push fixed rates lower is changes to the consumer credit code, made in late 1996.
It is now easier and less expensive for borrowers to move between lenders. This had encouraged lenders to offer better deals to ensure customers did not move, said Market Faxts analyst Mr Tony McCoy.
He said that when choosing between a fixed- and floating-rate loan, borrowers should also recognise the different features of each. Generally, fixed-rate home loans have fewer features than variable-rate loans.
For variable loans, early repayment is allowed. For fixed rates, early repayment may attract penalties, or the extra repayment allowed may be limited.
F IXED-rate loans do not normally have redraw, line of credit facility or mortgage offset facilities, whereas variable rates do.
Also fixed-rate loans may have "break costs" associated with terminating the loan agreement before the end of the specified period. These do not apply to variable-rate loans.
Fees and charges vary little between fixed- and variable-rate loans. Judging which was better - a fixed or variable interest rate - involved taking into account interest rates now and in the future, fees and charges, and the need for extra features, analysts said.
The Australian Consumers Association's industrial officer, Mr Peter Kell, said borrowers must be aware there is no sure thing with regards to the direction of interest rates in the future.
He said 18 months ago, financial advisers were suggesting borrowers lock into fixed mortgage rate loans. Interest rates are now 2.5 per cent lower.
"Be very wary of lending agents that say interest rates will definitely move in one direction or another. If they knew that for certain, they wouldn't need to be working telling you what to do."
Count Financial Services Group's deputy managing director, Ms Kylie Lambert, said people who struggled to make home loan repayments might find a fixed rate advantageous.
"But for the majority, we suggest they stay on variable rates," she said.
"Otherwise you are betting against the bank and they [charge interest rates] that makes sure they win. Why bet against them?"
NSW'S BEST HOME LOAN DEALS Product Company Interest Rate % AAPR% Variable Residential Housing Corp 5.89 6.00 Introductory Fixed 1yr Prudential 5.49 6.33 1-year fixed Various 5.45 - 2-year fixed Various 6.25 - 3-year fixed Various 6.49 - 4-year fixed ING Bank 6.85 6.77 5-year fixed Super Home Loans 6.90 6.80 Home loans ranked by Annual Average Percentage Rate. The AAPR incorporates the nominal rate with any upfront or ongoing fees on monthly cash flow over 7 years for a loan of $100,000 with a loan-to-value ratio of 75%. Source: Cannex
© 1998 Sydney Morning Herald