The country’s biggest banks may have slashed their fixed mortgage rates, but historically home buyers prefer to try their luck when it comes to borrowing costs.

Unlike most other countries, we are a nation of risk takers who opt far more for the flexibility of floating loans rather than the certainty of a set interest rate.

The Commonwealth Bank, NAB and Westpac are engaged in a fixed mortgage war, yet on average only about 12 per cent of home loans have been fixed during the past 22 years.

While this new chance to lock in record low interest rates at less than 5 per cent may whet the appetite for fixed home loans, they have never dominated the Australian market in the same way as in the US and Europe.

The proportion of fixed rate mortgages reached its peak at 25.5 per cent during the global financial crisis, according to Australian Bureau of Statistics data, as home buyers feared rates would keep rising and squeeze household budgets. It stood at 14.9 per cent of home loans in May, having stayed close to that level for the previous four months.

Australians’ preference for variable rate mortgages proved helpful during the GFC, as it gave the Reserve Bank of Australia a direct way of stimulating the economy when needed.

Variable loans fluctuate with the cash rate, which has been set at an unprecedented low of 2.5 per cent for almost a year. Fixed loans reflect the outlook for the cash rate and bet on it being increased.

Mortgage and Finance Association of Australia chief executive Phil Naylor said there is “something in the Australian psyche” that leans towards being carried by the market rather than fixing against it.

The possibility of making a saving if interest rates drop and of being able to pay the loan out early entices home buyers to variable rates, he said. Until recently, it was also variable rate loans that were flogged to homebuyers rather than fixed.

“It’s always been the case. It’s just been traditional in Australia that Australians have opted for variable rates. They prefer that flexibility rather than being caught in a fixed rate mortgage when rates go down,” Mr Naylor said.

Another reason home buyers might prefer variable rates is because mortgage rates are mostly only fixed for up to five years in Australia, HSBC Australia and New Zealand chief economist Paul Bloxham said.

The longer term rates, of 10 to 15 years, tend to be higher and this makes it more attractive for home owners to stick to variable or only short fixed rate mortgages, he said. Unlike in Australia, in the US fixed rates have little or no break fees making them more flexible for consumers and increasing competition between lenders.

“In Australia you mostly have fixed mortgages of one, three or five years available. If you compare it to the US, for example, the bulk of mortgages that households there have are 30 years. The Australian market doesn’t have that sort of product on offer,” Mr Bloxham said.

But the latest move by the big banks, combined with the possibility of a interest rate rise in the future, could encourage more punters to place their chips on a fixed loan.

Michelle Hutchison, from online loan comparison service Finder, said she would not be surprised if home buyers started to pay fixed rates more attention.

“Borrowers know that an interest rate rise is on the horizon and fixed rates are still dropping and becoming competitive with variable rates,” Ms Hutchison said.

“It could also be possible that these fixed rates may not last long, in a weeks time they might be up again. Fixed rates do move more than variable.”

Rate City chief executive Alex Parsons said the move by the big banks to drop their fixed loans made it a “super exciting” time for Australians home buyers. “This change is significant and it spells out a new round of competition. It spells out that banks are prepared to fight for consumers and that’s great,” he said.

Posted by Melanie Kembrey – Sydney Morning Herald on 24th July, 2014