The Benefits Of A Quick Fix

Sydney Morning Herald

Wednesday October 30, 2002

John Collett.

Locking in at today's rates can save thousands in the future, reports John Collett.

With most fixed-rate mortgages at, or below, the standard variable rate and forecasters predicting the next move in variable rate will be up, now is an ideal time to fix all or part of a mortgage. But borrowers will have to act quickly as fixed rates are expected to start rising soon.

Fixed rates move in line with long-dated bond yields and these have been moving up in recent weeks as the worst of the gloom appears to have passed and investors switch out of bonds and into shares. Simon Doyle, a senior economist at AMP Henderson Global Investors, says fixed rates will not stay this low for much longer.

At the Commonwealth Bank, Australia's biggest housing lender, the standard variable rate is 6.57 per cent, according to the bank monitor Infochoice. The bank's fixed rates are 5.99 per cent for one year, 6.29 per cent for two years and 6.39 per cent for three years. The four- and five-year rates are a fraction higher than the standard variable rate at 6.57 and 6.69 per cent respectively.

``Put some in fixed [rates] because in three years' time the rates will be higher than they are now," suggests Rod Cornish, head of property research at Macquarie Bank.

He says investors who want more certainty on their loan repayments and those owner-occupiers who would be stretching the family finances if rates were to move up should consider fixing 100 per cent of the loan.

Variable rates track the official cash rate set by the Reserve Bank of Australia (RBA) which is at 4.75 per cent. AMP's Simon Doyle says it is ``increasingly unlikely" that the RBA will raise rates this year, but like most analysts, he expects modest rises further out.

Doyle says the main reason that rates are most likely to stay on hold this year is that inflation, once the effects of the drought on rising food prices are taken out, remains within the RBA's annualised 2-3 per cent target range (see graph at right). He says the prices of goods imported into Australia are falling and this should keep inflation in Australia subdued. The housing boom, which is also adding fuel to inflation, is likely to come to an end soon.

Inflation could even move down to below 2 per cent over the next few quarters, says Mark Rider, UBS Warburg's chief economist, Australasia. ``We expect the RBA to remain on hold, possibly until 2004," he says.

Robert Mellor, director of building services at property forecasters BIS Shrapnel, is factoring in an increase in the cash rate of 0.25 or 0.5 per cent, to 5 or 5.25 per cent, by June next year. He thinks any significant rates rises would not come through until the end of 2004. Consequently, he thinks now is a good time to fix for a five-year period.

Andrew Willink, the managing director of Cannex, which monitors interest rates, says: ``If you are concerned that interest rates may go up, the `insurance' premium on five-year fixed rates is only about 0.2 per cent on most loans.

``Probably the wisest course for owner-occupiers is to split the fixed and variable components half-half, rather than 100 per cent," advises Willink. ``That way you will be at least 50 right rather than 100 per cent wrong."

Another favoured strategy of his is the ``pretend fix". He recommends home buyers may like to stick with the variable rate, but pay 1 per cent more in repayments than they have to. This way there is a ``cushion" to rate rises and if rates do not change, borrowers have the satisfaction of knowing that they are cutting into their loan.

Those thinking of sticking with variable rates should be aware that most lenders now have so called ``basic" loans which have interest rates about 0.5 per cent below the standard variable rate. The basic loan is cheaper because it has less flexibility in terms of extra repayments and may not have features such as redraw and offset accounts.

Redraw allows the borrower to accelerate their loan repayments, but also gives you access to the additional funds if needed. Offset accounts are attached to the home loan and any money put into the account reduces home loan balance and saving interest on the mortgage.

Willink says that basic loans deserve consideration. A saving of 0.5 per cent a year compounded over many years can add up to big savings.

The once stark distinctions between standard variable and basic loans are disappearing. Many basic loans now have redraws and offset accounts (although fees may apply). Some basic loans have severe ``break" fees for those who switch to another lender within three years.

Willink says when shopping around for home loans buyers should ask lenders for the average annual percentage rate, or AAPR, of any loan. This is a single figure that includes all the loan's costs such as any establishment fee, the interest rate and any ongoing account fees.

From July 1 next year under the Uniform Consumer Credit Code lenders nationally must advertise the AAPR of their home loans and personal loans or risk a fine of up to $500,000. But many lenders are producing the AAPR before the deadline, so make sure to ask.

© 2002 Sydney Morning Herald

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