Fixed-rate mortgage demand driven by cheap deals – but still off GFC peaks: Mortgage Choice

Fixed-rate mortgages currently account for around one in four loans (22%) written by Mortgage Choice brokers and could rise even higher following Australia’s biggest mortgage lender, the Commonwealth Bank, cutting fixed interest rates twice in May. 

However, demand for fixed-rate loans is still well below the record levels written in December 2007 (36%) and February 2008 (37%), according to data prepared by Mortgage Choice for Property Observer.

Source: Mortgage Choice

The rush to take out fixed-rate mortgages over this period burned many fixed-rate borrowers who took the three-year fixed products, as the RBA rapidly reduced the cash rate in response to the GFC. 

The RBA cut the cash rate from 7.25% in August 2008 to 3% by April 2009. 

Borrowers who took out a three-year fixed-rate loan in August 2008 would only have been able to refinance into a cheaper product late last year – unless they were willing to pay early exit fees – in some cases, thousands of dollars. 

“The cash rate continued to rise during early February 2008, while fixed-rate demand began tapering off as the impact of the GFC moved closer to home,” explains Mortgage Choice spokeswoman Belinda Williamson. 

“In the years since we have not seen fixed-rate demand return to the pre-GFC levels. The closest it has come was in March 2012, when fixed-rate demand reached 26%.” 

She says the jump in fixed-rate loan demand in 2007, up from 23% in July 2007 to 27% in August 2007, coincided with the cash rate rising for the first time in almost one year. 

“The cash rate jumped again in November 2007, and during this same month, Mortgage Choice reported record levels in the fixed-rate loan uptake (to 37%, up nearly six percentage points from October 2007),” Williamson says. 

“The cash rate continued to rise during early February 2008, while fixed-rate demand began tapering off as the impact of the GFC moved closer to home.” 

Currently, demand for fixed-rate mortgages has remained high despite the Reserve bank cutting the cash rate in November and December, and a double rate cut in April.  Westpac predicts another 50 basis points in cuts between now and August.

Official ABS figures also have fixed-rate demand at 14.5%, the highest level since 2008, with most of the growth occurring during the period starting in November when the RBA began cutting official rates.

Figures compiled by Canstar Cannex for The Australian also show that fixed rate loan commitments have grown rapidly after making up just 7.5% of all new mortgages in March last year.

In January 2010, fixed rates accounted for just 0.88% of Mortgage Choice loans – the lowest level in five years.

Currently, demand is being driven by the cheap rates on offer in the fixed-rate space.

The Commonwealth Bank currently offers a standard variable mortgage of 7.01% but a three-year fixed rate of 5.99%, which illustrates in a nutshell why fixed-rate products remain so appealing. 

Aside from the CBA, Westpac has trimmed its three year-fixed mortgage by 20 basis points to 6.19%; HSBC has cut its three year fixed-rate product to 6.09% (or 5.99% for those investors who take up the interest-in-advance offering) and ME Bank has cut its three-year fixed rate mortgage product to 5.99%.