Lenders trying to entice fixed rate borrowers

Lenders are taking advantage of constant media speculation of interest rate rises and the new ban on exit fees to entice borrowers to refinance into fixed rate products.

The push by lenders follows the RBA opting to leave interest rates on hold in July.

Big four bank ANZ is now forecasting the next rate rise may not be until February 2012, saying: “Australian interest rate markets are currently flirting with the idea that the next move in interest rates might be down.”

The HIA has weighed into the debate, arguing that the RBA needs to keep rates on hold for the foreseeable future.

"In this environment, a rate hike would do considerably more damage than might have historically been expected – not in the least to the housing industry,” says HIA chief economist Harley Dale.

Mortgage comparison website RateCity has recorded 18 lenders that have dropped their three-year fixed rates by as much as 60 basis points during June.

On average, fixed interest rates are now just 8 basis points above the current average standard variable rate of 7.30%, with 36 lenders listed on the RateCity database offering three-year fixed rates below that variable average.

Research compiled by RateCity for Property Observer revealed that 18 lenders dropped their 3-year fixed rates by up to 0.60%, while three lenders increased their 3-year fixed rates by up to 0.20%.

The biggest movement downwards has been made by small lenders – Select Credit union has cut its 3-year fixed rate loan by 60 basis points to 7.39% while non-bank lender AIMS Home Loans has cut its 3-year fixed rate loan by 47 basis points to 7.30%.

Of the bigger lenders, Westpac cut its 3-year fixed rate loan by 20 basis points (7.29%) and ANZ by 10 basis points to 7.24%.

According to Damian Smith, CEO of mortgage comparison website RateCity, lenders are offering attractive fixed rate home loan deals to encourage lending and to “retain current customers with longer-term deals as exit fees on variable rate loans are banned”.

“Lenders are clearly competing harder with their fixed rate deals at the moment, despite a general consensus that interest rates will rise in the coming months. 

“The ban on excessive early fees does not include break costs for fixed rate home loans, so it’s a better deal for lenders to increase their customer base for fixed loans,” he says.

However, hotspotting.com.au director Terry Ryder has warned borrowers to stop listening to media speculation, which “to date has been inaccurate”.

July mortgage statistics put out by mortgage broker AFG suggest borrowers are buying into the media speculation.

According to AFG, the percentage of borrowers who take out fixed rate loans has risen from 6.6% from February 2011 to 8.2% in July.

In contrast, introductory ‘honeymoon’ loans – where the borrower is offered a very cheap initial rate – have declined from 13.2% to 11.5%.

Mortgage Choice revealed that the popularity of fixed interest rate home loans hit its highest level in five months in June 2011, reaching 12.3% of all approvals.

The broker is urging mortgage holders to stop and think carefully before considering refinancing their mortgage following the exit fee ban.

“We want to ensure consumers understand the exit fee ban applies only to new home loans taken out after 1 July, not existing loans, and there are still other switching costs and home loan aspects that must be considered,” says Mortgage Choice spokesperson Kristy Sheppard.

She warns that borrowers who decide to switch should take note that if a current home loan has exit fees, those don’t simply disappear on July 1.

“Also, there is still a range of other switching costs that you may incur, such as discharge fees, break costs and lenders mortgage insurance. Weigh up the costs and benefits against your goals.”

The ban on exit fees, also known as deferred establishment or early repayment fees, applies only to all new home loans taken out after July 1.