Low interest rates driving fixed loans

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.”