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The fix is on for bank mortgage rates: should you take the deal?
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Any home loan rate that has a 'four' in front of it is always going to attract a lot of interest.
So says the Commonwealth Bank’s general manager for home loans, Clive van Horen, after Australia’s biggest mortgage lender joined the other major banks by offering a 4.99% two-year fixed home loan rate this month.
The major banks took a while to join the fixed-rate cutting party, but now each is offering a two-year fixed rate starting with 'four' as they try to get more borrowers to lock in their mortgage rate and lender for anywhere from one to five years.
Van Horen tells Property Observer there has been a pick-up in borrowers opting for fixed-rate mortgages since the bank began cutting its fixed rate.
“Customers want to get certainty,” he says.
There is a growing proportion of borrowers who are hedging their bets by splitting their loan and keeping part of it on a variable rate, he says.
“That way they get the best of both worlds.”
Similarly, Westpac, which was the first of the major banks to offer a sub-5% fixed rate this year is seeing an uptick in people fixing their home loans at its current 4.99% two-year fixed rate.
“At the moment (and not surprisingly) the two year deal is the most attractive but historically the three year fixed has been the most popular as people look for both security and peace of mind when it comes to longer-term repayments,” Westpac spokesperson Danny Johns says.
A spokesperson for NAB says it is already seeing increased demand for fixed rates after cutting one and two year fixed-rates earlier in the month.
"Generally, the three year rate is the most popular, but at the moment with the two year rate at 4.99%, it has generated a lot of interest."
Borrowers can get even cheaper fixed rates if they’re prepared to look outside the major banks. Mutual lender ME Bank has cut its three-year fixed rate to 4.99%, while iMortgage, the online lending arm of ASX-listed non-bank lender Homeloans Ltd, is offering a two-year fixed rate of 4.79% - currently the lowest rate in the market.
The right set of curves
Lenders are able to offer these lower fixed-rates because short-term funding costs have come down.
Nomura banking analyst Victor German explains that banks price their fixed-rate home loans off a swap curve, which is essentially a measure of yields paid between banks for short term funding of different maturities.
He says the current two-year swap yield has dropped below 3% - currently it sits at 2.97% - while the three-year year swap is at 3.15%.
So even at a two-year or three-year fixed-rate of as low as 4.79% there is a healthy margin for the bank or non-bank lender – and margins have been increasing as the recent financial results put out by the Commonwealth Bank, ANZ and NAB attest.
German says the fixed-rates being offered by the banks is simply a play to get more business through the door in an environment of lower credit growth. The move also allows banks to lock customers in for a fixed period of time with the added benefit of cross-selling them other products and improve that all-important bank ratio: number of products per customer.
The question borrowers may be asking themselves is: should I now consider fixing all or some of my mortgage repayments and take advantage of the low rates on offer?
But there might also be an argument for waiting a while longer – given the margins available, further fixed-rate cuts seem a distinct possibility.
To fix or not
It’s a difficult argument for Australian borrowers to resolve.
Many who fixed pre-GFC got badly burned when fixed rates tumbled as the RBA took an axe to the cash rate to keep the economy and housing market afloat.
That’s unlikely to occur to the same extent because, firstly, the cash rate is already at the GFC low of 3% and, secondly, it appears that the global economy is more or less in recovery phase.
Last week’s statement by RBA Glenn Stevens to a parliamentary committee suggested low rates are here to stay and may fall further if the economy fails to fire, but that any further cash rate cuts could be on hold for some time.
Still, with NAB's chief economist Alan Oster tipping a cash rate of 2.25% by year-end, fixed-rate borrowers could lose out if such a scenario eventuates.
Currently, the enticements of fixed-rates are the low sub-5% offers in the market and the certainty of repayments.
It remains, however, a marginal product with the majority of borrowers; 80% to 85% choose a variable offer of some kind.
According to audience figures compiled by comparison website HomeLoanFinder.com.au, the three-year fixed-rate product is by far the most popular, but there is also some interest for attractive two-year and five-year products.
Fixed-rate product popularity:
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The current policy solves a short-term problem by creating jobs in the building sector, but in the long run it is likely to place young first home buyers under financial pressure.