Puzzle Finance Blog


If it ain't broke, put off fixing it


Before opting for a fixed-rate deal, research all your borrowing options and be aware of the risks.

Is it wise to lock into a fixed-rate home loan or should you continue to keep a keen eye on the market?

Up to 30 per cent of new home loan customers are fixing the interest rate on all or part of their borrowings, a record market share for fixed-rate loans in Australia.

If you're considering a fixed-rate deal, you need to research all your borrowing options and be aware of the risks.

You shouldn't blindly accept that the interest rate cycle is at the bottom, either. Many economists and commentators believe the Reserve Bank is engaging in a ''tactical pause'' on rate cuts.

''I think it's too soon to lock in,'' says adviser Richard Wakelin, of Wakelin Property Advisory. ''It may not happen next month or the month after, but there is room for another rate cut.''

The RBA held its cash rate at 3 per cent at its March and April meetings. On both occasions the bank said slightly sub-par economic growth gave it the room to cut rates again if necessary.

After the April 2 meeting, RBA governor Glenn Stevens said the bank remained on standby ''to ease policy further, should that be necessary.''

Tactical signals such as this have prompted more than a few bank economists to predict the cash rate will be cut once more, to 2.75 per cent. Some have forecast a low-ball cash rate of 2.25 per cent by the end of 2013.

What happens in the final wash-up will largely depend on whether the Australian dollar remains high and whether there is a sustained deterioration in employment.

The national jobless rate rose to 5.6 per cent in March. That didn't stop thousands of borrowers from taking out new fixed loans with two-year and three-year rates set below 5 per cent.

Three of every 10 home loans approved in March by the nation's largest mortgage broker, Australian Finance Group, were fixed loans. It was the highest share of fixed loans the company had seen in the 10 years it has been compiling its mortgage index.

Another national broker, Mortgage Choice, also says demand for fixed loans is on the rise, accounting for 27.5 per cent of new loans approved in March. This was a 9 per cent increase from February and the highest share of fixed-rate loans seen by the group since March 2008.

It's worth remembering that the first months of 2008 marked the start of the global financial crisis. Borrowers who fixed loans just before the financial crisis were severely burnt when the RBA slashed the cash rate and sent fixed rates tumbling.

Banks compete more keenly for fixed-rate customers than they do for variable-rate customers. Fixed loans allow lenders to lock in customers for a set number of years and cross-sell other products such as credit cards and insurance.

The number of products for each customer is a crucial ratio for banks. A relationship based on multiple products is the main way they keep customers.

Banks operate trading rooms filled with economists and analysts, whose task is to understand, and be able to forecast, movements in interest rates.

The most important thing to be aware of when you negotiate a fixed loan is that you're betting you know more about the direction of rates than the banks do. Of course, the reality is that you don't, so the smart approach is to fix half your loan and keep the other half at the variable rate. That way you can only be half-wrong.

Posted by Chris Tolhurst - The Age on 20th April, 2013 | Comments | Trackbacks
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