Borrowers rush to fix loans as lenders cut rates

INTEREST rate uncertainty continues to spook Australian borrowers, who are rushing to lock in their home loans, encouraged by recent fixed rate cuts by major banks.

Demand for fixed home loans has hit a four- year high, Mortgage Choice data shows, accounting for 31.05 per cent of all loans written in August. This was up from 29.63 per cent in July, according to mortgage Choice CEO John Flavell.

“Demand is at its highest level since December 2013, when fixed loans accounted for 33.06 per cent of all loans written,” Mr Flavell said. “Recently we have seen a number of Australia’s lenders cut the interest rates charged on some of their fixed rate products.

“Fixed rate home loans are now very competitively priced, which has made them more attractive to homeowners who are looking for repayment security.”

Queensland experienced the highest demand with 35.48 per cent of loans fixed; a giant leap from the 28.08 per cent recorded the month before. South Australia was next with 34.4 per cent, while New South Wales saw 33.66 per cent of loans fixed.

Consumer comparison company Canstar has also seen a trend of customers looking for rate certainty, with the number of website users who have changed their search from variable to fixed rates increasing by 4 per cent since the previous quarter, according to Canstar finance commentator Steve Mickenbecker.

“Banks have been using fixed rate loans as their price leaders,” Mr Mickenbecker said.

“Comparing average package rates for the major banks for residential principal and interest loans, the two- year fixed rate is 0.53 per cent below the variable rate … there is an immediate saving enticing the borrower to switch.

“With two year fixed rates … averaging 3.92 per cent and three- year fixed rates averaging 3.97 per cent, fixed rates are allowing the banks to market loans that are starting with a three.”

Luring new customers with attractive fixed rate products is a way for banks to safeguard against the effects of upwards or steady variable rates on existing customer numbers.

“With the cash rate sitting at a record low for 14 months, a further downward move is looking unlikely,” Mr Mickenbecker said.

“This means the risk of a high cost early exit from the loan, if that becomes necessary, is relatively low.

“Picking the bottom is always tricky, but rates appear to be near the bottom of the cycle. It looks like the only way they’ll be going in the medium term is up.”