Fed: Homebuyers shunning fixed rate mortgages

AAP General News (Australia)
04-06-2009
Fed: Homebuyers shunning fixed rate mortgages

By Colin Brinsden, Economics Correspondent

CANBERRA, April 6 AAP - Home buyers have all but given up on fixed-rate home loans
in anticipation of the Reserve Bank of Australia (RBA) cutting interest rates further,
banker and insurer Suncorp says.

The RBA holds its monthly board meeting on Tuesday and economists are split on whether
the central bank will hold the cash rate steady for another month or reduce it by a further
25 to 50 basis points.

Even if it doesn't cut the rate this month, financial markets are betting on further
reductions this year towards two per cent.

The cash rate stands at a 45-year low of 3.25 per cent.

"The fact that our customers are typically continuing to favour the variable rate option
indicates that they seem to be largely betting that the official interest rate will fall
further," Suncorp's general manager of banking Terry Wasmund said.

New figures released by Suncorp on Monday showed that only one per cent of its customers
took out a fixed rate home loan in February compared with 42 per cent a year earlier.

"We haven't seen a market like this for a very long time," Mr Wasmund said.

Still, mortgage broker the Loan Market Group said now was the time to be considering
a fixed-rate mortgage.

It says fixed rates have already started moving up, even though official rates are
expected to be lower this year.

Fixed-rate mortgages are based on wholesale market interest rates, while standard variable
rates are usually led by official interest rate decisions.

"Many consumers are unaware that the variable rates move differently to fixed rates
and by the time variable rates have bottomed they have missed the best opportunity to
fix," Loan Market Group executive director John Kolenda said.

"If you are able to secure a great fixed rate in the high four per cent or low five
per cent range for a three-to-five-year period then you should seriously look at it."

Mr Wasmund said Suncorp's standard variable rate stands at 5.9 per cent, while a three-year
fixed rate sits at 6.39 per cent.

Someone taking out a $250,000 mortgage over 25 years would be paying an extra $904
per annum to fix.

"But the benefit is they do have some surety in terms of how much they have to find
each month and some protection in the form of a reasonable safety net should interest
rates rise again," he said.

He said it is a different situation for customers with existing fixed-rate loans as
they need to assess whether break fees to exit their loan are going to be recouped in
the longer term if official interest rates keep falling and stay low.

"If they chose to move to a lower variable rate, the savings wouldn't actually kick
in until they'd covered the break fee associated with exiting their current loan, so interest
rates would have to stay low for a considerable amount of time for any advantage to be
realised."

AAP cb/jl/mn

KEYWORD: RATES MORTGAGE WRAP

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