Low interest rates keep fixed mortgage demand high, but popularity of basic and standard variable products rising: Mortgage Choice and AFG

Low interest rates have kept demand for fixed-rate home loans at high levels, according to May mortgage processing figures from Mortgage Choice and AFG.

However, the broker figures also show that the May rate cut encouraged more borrowers to take out variable-rate products, suggesting that demand could rise if most of yesterday’s official rate cut is passed on by the major banks. 

According to Mortgage Choice spokesperson Belinda Williamson, the June rate cut and forecasts of further rate cuts could make variable-rate home loans even more attractive to borrowers. 

“Stronger demand for variable rate home loans is likely to be at the expense of fixed-rate loans,” she says.

“More borrowers may choose variable over fixed, in at least the short term, as they become even more comfortable with variable rate loan pricing. In May, Mortgage Choice data suggested that borrowers found comfort in lenders’ decisions to pass on the majority of the rate cut savings.

“On the flipside, fixed rate loan uptake levels could be influenced by increasingly attractive fixed-rate loan pricing. In recent months, some lenders dropped their fixed-rate loan pricing to below 6%,” Williamson says.

As at June 4, 2012, the average three-year fixed-rate loan interest rate, based on lenders on the Mortgage Choice panel, was 6.28%, one-year was 6.14% and 5-year was 6.69%.

"Borrowers will be wise to weigh up the benefits of further rate cuts against the affordability and security of fixed rate loan pricing," says Williamson.

Official ABS data on demand for fixed rates lags two months behind rate decisions (May housing finance data will only be released in July), with April showing 15% of borrowers choosing a fixed-rate product, the highest level in four years. 

So the May results from the two mortgage broking businesses – which combined write around one in five home loans in Australia – provide a good estimate of current consumer appetite for fixed-rate loans.

Mortgage Choice May figures show a small drop in fixed-rate demand in May, though fixed rates still account for one in five home loans written by its brokers.

This is below the six-month average (22.5%) but above the 12-month average (19%). 

Mortgage Choice highlighted that fixed-rate demand fell marginally, despite a number of lenders dropping their fixed-rate pricing below 6% in May. 

The Greater Building society offers a three-year fixed rate of 5.79% while seven lenders (Commonwealth Bank, ING Direct, ME Bank, CUA and Aussie, Citibank, IMB Building Society) offer a three-year fixed rate of 5.99%. 

The May Mortgage Choice figures show that basic variable mortgages were the only product category were demand rose over the month, up from 14% to 17% of all mortgages – above the 12-month average and at a nine-month high. 

According to Williamson, basic variable mortgages “tend to be more affordable but less flexible with fewer features at the borrower’s disposal”. 

“The increased interest in basic variable rate loans, which is now at a nine-month high, could signal a return to the market by first homebuyers, as these loans tend to be more popular with lower income and less experienced borrowers who are still finding their feet in home loan market.”

Similar to Mortgage Choice figures, close to one in five home loans written by AFG brokers in May was for a fixed-rate product. 

For AFG brokers, standard variable loans proved most popular with borrowers – accounting for 59% of all loans processed over May – up from 57.5% and rising for the second straight month having fallen from January to March.

According to Mortgage Choice May figures the biggest increase in variable-rate loan demand was recorded in SA (up 12%, to 85%), followed by NSW (up 4%, to 77%), WA (up 1%, to 79%) and Queensland (up 1%, to 74%). 

The only state to buck this trend was Victoria, where the popularity for variable-rate loans dropped by five percentage points, to 86%. 

Ongoing discount-rate loans – where the interest rate is discounted over the entire loan term, usually in exchange for an annual fee – made up 40% of all variable-rate loans approved in May. This was in line with April, but slightly below the six-month and 12-month average of 41%.