Be Quick On Cheap Home Loans

The Age

Monday March 25, 1996

Ross Greenwood

Interest rates are tipped to rise over the next few years, and then fall. In this scenario, the best strategy for home owners is to lock in one of the fixed-rate loans on offer at the moment.

AS MONEY market interest rates have again been pushed up this week, the indications are that many of the cheapest home loan deals will dry up in the coming weeks. In the past two weeks, some banks have increased their fixed-rate loans and further increases in money market rates will see more cheap deals evaporate.

The theory is that, during the next two to three years, while the Government tries to rein in the Budget deficit, interest rates will rise. Then if the move is a success, rates should fall.

The ideal strategy under such a scenario is to lock in two to three-year interest rates now (they are historically cheap anyway) and to refinance into a falling interest rate market in 1998 or 1999. The major banks have indicated that more than half of the loans they are currently selling are fixed- rate loans - and on the price side this is where the big banks have concentrated.

The two and three-year loans range from 8.69 to 8.95 per cent. These compare with the variable loans on honeymoon rates, which appear to offer 7.5 per cent but in reality kick out to between 9.95 and 10.5 per cent after one year.

The true rate which is quoted on the accompanying table is, in fact, the average annual percentage rate (AAPR), which works out to be the true cost of the mortgage over seven years.

Seven years is the average term an Australian holds on to a mortgage, perhaps paying the loan off but more commonly selling the house.

The slightly misleading point of the AAPR can be highlighted using the ANZ's two-year fixed rate loan. While the AAPR on this loan is quoted at 9.85 per cent, this assumes that you have spent five years at the default (or current variable rate) of 10.5 per cent. The ideal situation with a fixed-rate loan is to have your cost of funding locked in at a lower rate while ordinary rates are higher . . . and then to refinance into a cheap variable rate loan while rates are falling.

So if you were to use the ANZ's or the State Bank of NSW's 8.69 per cent two-year fixed rate loan, your hope will be that their variable rate will be on the way down when your loan expires in two years' time.

Many of the larger banks, having lost business in the past by allowing fixed-rate borrowers to simply ``roll" on to the higher variable rate loan (now 10.5 per cent), have become more proactive by contacting customers before their fixed- rate loan ends.

The option is to take a shorter-term view of the world, and pick up the advantage of a ``honeymoon" rate, where the bank will entice you into taking their loan with an artificially low rate for 12 months, but then will tie you into one of the higher variable rate for a period after the honeymoon is over.

As you can see, the cheapest honeymoon rates are currently between 7.25 and 7.5 per cent, but once you have included the fees of the loan and a seven-year time frame, these loans become line-ball with the fixed-rate loans.

The lock-in period (up to three years) which many banks now demand of customers who take the honeymoon rate means that, in some cases, there is better flexibility and comparable prices if you take a fixed-rate loan.

Another anomaly, the survey finds, is that the major banks, said to be under enormous competition from the smaller non- banks in home loans, feature prominently among the top five in each of the fixed-rate categories.

Bank spokesmen claimed last week that the major banks have put more effort into winning customers with fixed-rate loans, knowing they are more competitive in this market.

For interest's sake, the top five variable rate loans this week are the Superannuation Members Home (through National Mutual) loan at 8.7 per cent with a true rate of 8.8 per cent; the Metro Credit Co-op at 8.8 per cent (8.9 per cent true rate); National Mortgage Market at 8.8 per cent (8.92 per cent); FAI First Mortgage at 8.8 per cent (8.93 per cent) and BMC Mortgage with 8.85 per cent (8.97 per cent).

While on the face of it these loans look considerably cheaper than their fixed-rate counterparts, the difficulty is that if rates kick up, these loans will also increase. Indeed, many of the non-bank home lenders - which depend almost entirely on these lending operations for their business - could be more sensitive to money market interest rate moves than some banks. But the smaller lenders and their borrowers have so far been fortunate in that most of the moves in interest rates have not occurred in the short term; longer term rates have increased more.

The ANZ's David Wilson says the bank took a deliberate strategy earlier this month to offer the fixed rate deal of 8.69 per cent until the end of April. ``At the moment we have taken the decision to run with that offer, but there are stresses in the market (namely higher money market interest rates) which we will have to take into account."

Perhaps because of the uncertainty about whether these deals will last, particularly if you are wanting to roll other loans into your home loan as well, a quick visit to the bank might be in order.

When dealing with your bank, it is important to seek a letter of offer, including an interest rate and an amount which the bank will allow you to borrow, which will hold for a defined period of time - perhaps 30 or 60 days depending on your need and the bank's flexibility.

     MORTGAGES YOU SHOULD CONSIDER NOW
     .                          Rate    Variable   True Rate*
     .                           %         %           %
     VARIABLE WITH INTRODUCTORY
     .       RATE
     VTU Credit Union (Vic)      7.5       9.95        9.80
     GIO                         7.5       9.95        9.83
     State Bank NSW              7.25     10.5        10.01
     Australian Unity B/S        7.5      10.5        10.09
     St George Bank Victoria     7.5      10.5        10.15
     2 YEAR FIXED RATE
     ANZ Bank                    8.69     10.5         9.85
     State Bank NSW              8.69     10.5         9.97
     BankSA                      8.75     10.45        9.99
     National                    8.75     10.5        10.02
     Bulk of institutions        8.95     Varies     Varies
     3 YEAR FIXED RATE
     Trust Bank                  9.15     10.35        9.74
     ANZ Bank                    9.19     10.5         9.83
     MLC B.Soc                   9.25      9.95        9.74
     Cornerstone B.Soc           9.25     10.35        9.79
     Advance Bank (Vic)          9.25     10.5         9.89
     5 YEAR FIXED RATE
     ANZ Bank                    9.69     10.5         9.87
     MLC B.Soc                   9.75     9.95         9.94
     St George Bank Victoria     9.75     10.5        10.01
     Commonwealth Bank           9.75     10.5        10.03
     National                    9.75     10.5        10.09

     True rate calculates the internal rate of return on
     monthly cashflows over 7 years including all non
     statutory fees (upfront and ongoing) on $100,000
     (20th March 1996)
     Source: CANNEX

© 1996 The Age

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