Be Quick To Fix A Good Interest Rate

Sun Herald

Sunday August 10, 2003

By DAVID POTTS, BUSINESS EDITOR

YOU can give yourself a rate cut even if the Reserve Bank refuses to play ball.

The markets, which only a few weeks ago were saying there'd be a rate cut, now expect an increase next year.

There's a simple reason for their being all over the place: interest rates here depend on what the US is doing there.

And the US is over-serviced with economic statistics. Barely a day passes that a new stat doesn't come out, often contradicting something from the day before. And just to keep you guessing, the figures are often revised a month later anyway, more often than not finishing up going in a different direction altogether.

Still, the money is on a strengthening US recovery.

In fact, yields on bonds, which are a benchmark for lending rates, have jumped so far in such a short time more than 1 per cent in a couple of months that they could snuff out the very recovery they're punting on.

But since the US Federal Reserve is on record as wanting to keep official rates low for as long as possible, Australia should be immune from the bond yield threat.

That means that official rates in Australia aren't going anywhere, so your mortgage is safe.

But the frenzy in the bond market means fixed rates, which are lower than variable rates, are on the move.

You can take advantage of this market oddity fixed rates are usually higher than variable rates because you should be paying the lender a premium for the certainty but you'll need to be quick.

Fixed-term rates have been creeping up, a trend that's likely to continue.

But if you shop around you can still knock up to 0.87 per cent off the standard variable rate of 6.57 per cent. Mortgage House has a two-year rate of 5.70 per cent.

On an average Sydney mortgage of $250,000, that's a saving of $134 a month. After allowing for Mortgage House's $600 application fee, you'd be ahead after five months.

Admittedly, there'd be a fee at the end of the fixed term when you converted to whatever the variable rate was then.

If you lock in for three years, the best deal is 5.85 per cent, also from Mortgage House.

For five years, the lowest rate is 5.99 per cent from Suncorp or Super Members Home Loans.

Don't forget, that if you earn more than about $75,000, the banks will discount their fixed rates by up to 0.25 per cent. Just ask.

If you've stretched the finances a bit by buying in the past couple of years, look at a no-frills variable rate.

The cheapest is Wizard's Ratebreaker at 5.39 per cent, though there's a $760 application fee which is really about $1000 once valuations and legals are taken into account. There's no redraw facility or flexibility. But, hey, it's still cheap as chips.

A good compromise if you're not totally cash strapped is Resi's 5.85 per cent variable rate. This has most of the bells and whistles of a top line bank loan, so lets you use your mortgage for everyday finances.

Mind you, these cheap loans don't protect you from future rate rises.

Looking three to five years out, there's at least an equal chance of rates rising as there is of them falling, and it's probably more like 60:40.

So fixing at least part of your loan gives you protection without losing all the benefits of a future cut if it happens.

Then there's the cocktail fix, if you're keen enough: fix some of your loan for different terms.

That will lower your average rate and give you more protection.

© 2003 Sun Herald

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