When A Quick Fix Is Not The Answer

Sun Herald

Sunday June 9, 2002

By JOHN DAGGE

BANKS and lending institutions are advising borrowers not to fix their mortgages, despite the near certainty of future rate rises.

Customers inundated lenders with queries about fixing their interest rates in the wake of the Reserve Bank's official 0.25 per cent rise last week. Very few, however, made the switch.

While analysts predict that official cash rates will settle between 5.5pc and 6pc by early next year which translates to mortgage rates of between 7.5pc and 8pc lenders say variable rates still offer better value.

Wizard executive chairman Mark Bouris said that, while there had been a rise in queries about fixed loans, most customers had not switched.

``There has been a significant increase in the number of people asking about fixing, but only a tiny percentage of those end up fixing," he said.

``Some of the first home buyers have been calling up in a bit of a panic, but that's primarily because the experience of rising interest rates is brand new to them.

``But we are getting an increased number of new customer queries about refinancing with us."

Aussie Home Loans managing director John Symond said he was advising customers to keep their mortgage on a variable rate.

``We've had an increase in inquires over the last few weeks about fixed loans but we are not seeing a huge shift," Symond said.

He said that, even if rates rose as high as 7.5pc, customers would be better off under a variable loan.

``Rates going to 7pc or 7.5pc is the maximum I could see them going to and, even then, a variable rate would still be a more attractive option," Symond said.

He said he was hopeful rates would rise by no more than 0.5pc.

Commonwealth Bank retail customer services general manager Nick Kennett said fixed-rate lending had been increasing since November.

``That's when sentiment in the media from the experts that interest rates had reached their bottom was strong," he said.

Fixed-rate lending usually contributes to 5pc of all home loans at the Commonwealth Bank. It constitutes 15pc of all loans after peaking at 20pc in March and April.

Mortgage House managing director Ken Sayer said feedback from customers was centred on the severity of future rises.

``The biggest concern seems to be how far will it go in the future," he said. ``There is a lot of speculation that we have 1pc to 1.5pc to go but I'm of the opinion that 0.5pc will see it off."

Sayer said variable rates, or a mix of fixed and variable, was the best option.

``Fixed loans are quite restrictive. You can't make extra payments, you can't have your salary transferred into it and you can't make redraws."

Lenders have echoed Prime Minister John Howard's concerns, warning first home buyers not to become over-committed.

``The ones these rises will most affect are first home buyers trying to get into the market who are facing higher rates and who haven't had the benefits of the first home buyers' grant," Symond said.

``They are the ones who will stretch themselves and who will feel every dollar increase."

With interest rates rising, Symond said he did not expect to see an increase in loan defaults particularly from those who used the first home owners' grant as part of their deposit.

``Most of the market, about 80pc, has enjoyed low interest rates for some time now," he said. ``They are in good shape and these rates were expected."

THE RATE DEBATE

TRACY Hourd is one of the many Australians who have agonised over whether to fix a home loan.

Hourd, who has a $450,000 loan with Wizard for her family home in Kellyville and an investment property, contacted her local branch financial adviser onWednesday.

In the end Hourd decided not to fix her loan, which attracts an adjusted interest rate of 6.22 per cent. Wizard has set fixed home loan rates at 7.44pc over two years.

``The interest rate I got at the time was very low and it is still much lower than the fixed rates," she said. ``Even if it goes up by 1pc I will still be better off."

Hourd said that while the rising rate bill would put pressure on the family budget, she felt she was in a good position to cover it.

``I've always repaid as much extra as I can so I've got a buffer for when times get tough."

Best mortgage rates: Page 6

© 2002 Sun Herald

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