Borrowers Look For Quick Fix To Rate Rises

The Age

Thursday April 4, 2002

Sharon Kemp

Home lending continues to grow at record pace despite economic data that points increasingly to an interest rate rise before the middle of the year.

But the story becomes less clear when talking privately to Australia's banks, which say lending approvals have dropped sharply this year since the first home owners' grant fell from $14,000 to $10,000. It becomes $7000 on June 30.

The grant drove frantic home buying in 2001, which in turn fuelled the Australian economy.

The amount of money lent to home buyers by March, 2002 was $331 billion and $1.2 million was added to the pile in February.

Australians were also invigorated by an optimism that accompanied a domestic economic performance that beat the recession entangling the economies of other developed countries, including the United States.

Despite the prospect of rising interest rates steadying that growth, statistics show home buyers in Australia are borrowing in order to fix in 30-year-low home interest rates and set their repayments for the next one to five years.

In fact, fewer Australians than 12 months ago have a fixed mortgage interest rate. Australian Bureau of Statistics data shows 7.6 per cent of homeowners had loans with fixed rates in January, 2002 compared with 9 per cent a year earlier.

There were good reasons last year not to opt for a fixed mortgage rate, including the likelihood that variable rates would fall, as they did. But the situation is different now. Economists are forecasting the Reserve Bank will raise rates by up to 1.75 per cent by the end of the year.

APRA data shows home lending rose by another 0.9 per cent in February, representing an increase of 16.9 per cent from the end of February, 2001.

And industry experts expect lending volumes to stay at high levels through the first expected interest rate rise since September, 2000, if it eventuates as anticipated in May. It is only towards the end of this year that growth is expected to slow.

SURVIVAL TIPS

Here are some things you can do to shore up your position while you wait for the Reserve Bank to move:

DO THE NUMBERS

Work out what you owe and do your homework. How much are you paying on each debt? Can you pay off your high-rate debts faster? Can you get a lower-rate credit card?

PAY OFF YOUR CREDIT CARD

Or at least, get card smart. With most rates around 14 to 18 per cent, credit cards are hardly cheap finance. If you are carrying a persistent credit card debt, you could consider moving to a low-interest credit card.

CONSOLIDATE YOUR SMALL, HIGH-RATE DEBTS

Consider rolling your credit card debt or debts into a personal loan or into your home loan, which generally have lower interest rates. But be warned: consolidating credit card debts only works if you maintain your total payments and exercise discipline with the plastic.

CONSIDER FIXING YOUR HOME LOAN RATE

Or not. Whitbred Financial Services principal and financial planner Angela Whitbred says home borrowers on a tight budget should think about locking in. ``Before you refinance, you really need to look at the costs of taking out a fixed-rate loan," Ms Whitbred warns. The cost of refinancing could match the impact of a 0.5 per cent rate rise on some mortgages, she says.

DON'T FORGET, YOU PAY FOR CERTAINTY

Historically borrowers on fixed rates have paid more. Most of the time, borrowers pay extra for the comfort of knowing exactly how much they will need to repay over a fixed term. Ms Montgomery says home borrowers with a little fat in their budgets can afford to take a wait-and-see approach. .

MAKE EXTRA REPAYMENTS

If you are ahead of schedule in repaying any loan, your lender is more likely to offer a sympathetic ear if things go horribly wrong. Monthly repayments on a $150,000 mortgage are roughly $970. If rates rise 0.25 per cent, repayments rise by about $23. If rates rise 0.5 per cent, they rise by $46 extra; 1 per cent, $93 and 2 per cent, $192.

SOURCES: WWW.INFOCHOICE.COM, WHITBRED FINANCIAL SERVICES

© 2002 The Age

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