Low in­ter­est rates driv­ing fixed loans

The Weekend Post - Real Estate - - Real Estate - BIANCA KEE­GAN

RECORD low in­ter­est rates are driv­ing de­mand for fixed rate home loans, new re­search has re­vealed.

Ac­cord­ing to Mort­gage Choice’s lat­est na­tional home loan ap­proval data, fixed rate home loans ac­counted for 20 per cent of all loans writ­ten through­out the month of Au­gust – up slightly from July loans.

CEO of the broking firm John Flavell said the ris­ing level of fixed rate loans was not sur­pris- ing. “In Au­gust, the Re­serve Bank of Aus­tralia (RBA) cut the cash rate by 25 ba­sis points, tak­ing the of­fi­cial rate to the new low of 1.5 per cent,” he said.

“But while the of­fi­cial cash rate was cut by 25 ba­sis points, Aus­tralia’s lenders failed to pass on the rate cut in full, with some cut­ting their res­i­den­tial home loan rates by just 12 ba­sis points.

“Given the RBA held the cash rate at 1.5 per cent in Septem­ber, we might start to see more in­ter­est in fixed rate home loans as peo­ple start to ques­tion if now is a good time to lock in a rate. If the Re­serve Bank does cut the cash rate again, it is clear that Aus­tralia’s lenders are un­likely topass on the full rate re­duc­tion.”

Roger Ward, of Cairns Mort­gage Bro­kers, said there were re­stric­tions when it came to fix­ing a home loan.

“With most lenders there are re­stric­tions on fixed rate loans which in­clude re­pay­ment re­stric­tions and no off­set ac­counts ,” Mr Ward said.

“Loan prod­ucts are driven by the bor­rower’s needs and many like the abil­ity to pay off their loan faster and use an off­set ac­count.

“Fixed rates are mostly used as part of a suite of loans as bor­row­ers can split their loans into com­po­nents of fixed and vari­able.

“This way they can man­age the neg­a­tives of fixed rates with the flex­i­bil­ity of hav­ing a vari­able rate com­po­nent.”

Mr Ward said bor­row­ers should be wary if fix­ing a loan for a long pe­riod of time.

“Fixed rate break costs will be in­curred if a bor­rower looks to get out of a fixed rate be­fore its term ex­pires.

“In a fall­ing rate en­vi­ron­ment the break cost is de­ter­mined by the gap be­tween the fixed rate and the cur­rent vari­able rate and if the vari­able rate is sub­stan­tially lower than the fixed, things can be very ex­pen­sive.

“It’s re­ally im­por­tant that bor­row­ers be aware that they need to be very sure they won’t need to pay­out their fixed rates pre­ma­turely.”

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