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Rates fix proves a fickle business

A FEW months is a long time in financial markets, as investors who switched to fixed rate housing loans will have discovered to their cost.

Over the six months to June, there was a marked pick-up in fixed rate housing loans as borrowers sought to lock-in rates ahead of expected rate increases.

The proportion of fixed-rate loans rose to more than 9 per cent of total loan approvals, according to the Reserve Bank.

There are several reasons for taking out fixed-rate loans, with the most important being the medium to long-term certainty they offer.

Nevertheless, many of the borrowers who opted for a fixed-rate loan earlier this year will be ruing their decision, for two reasons.

First, interest rates on variable rate loans have not increased, contrary to earlier expectations.

Second, interest rates on fixed-rate loans have fallen by about half a per cent since June. Three-year fixed rate loans are now as low as 6.39 per cent.

This introduces a tempting possibility for borrowers who have been biding their time.

They can lock-in a three-year fixed-rate loan that is cheaper than the interest rate on standard variable rate mortgages, which currently average about 6.55 per cent.

The decline in fixed loan rates coincides with renewed speculation of higher cash rates, which in turn dictate variable loan rates.

Recent labour force data showing strong jobs growth “increases the probability of a pre-Christmas cash rate increase”, according to BankWest economist Alan Langford.

He said that global economic and financial instability could derail hopes of a rate cut.

In a similar vein, HSBC Bank senior economist Anthony Thompson said the labour force data “reinforces our view that once the RBA is more confident in the global economic recovery, the monetary policy tightening episode will resume”.

“A rate rise will be on the table for discussion by the [RBA] board as early as the October 1 meeting,” he said.

While most economists expect another rate increase, this view is not unanimous

D&B economic consultant Dr Duncan Ironmonger expects cash rates to be unchanged “until sometime in 2003”.

The immediate outlook for interest rates is only one factor that borrowers need to assess when they weight up the pros and cons of fixed-rate loans.

Borrowers also need to assess the competing variable rate loans on offer. While ‘standard’ housing loan rates are about 6.55 per cent, ‘basic’ housing loans are at about 6 per cent.

The basic loans have many of the features of standard loans, such as flexible repayments and redraw facilities.

What they don’t have is the extra low ‘honeymoon’ rates for the initial six or 12 months, which have lured many home buyers into standard housing loans.

The Loan Cafe’s Anne-Marie Syme has found that very few borrowers take a fixed-rate loan for their entire debt.

Most people with a fixed-rate loan have split loans, meaning they have a fixed rate for part of their debt and a variable-rate loan for the balance.

The split is usually 50:50 and allows borrowers to hedge their bets. They get some protection if variable rates increase but they also get some benefit if variable rates fall.

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