Fixed-rate mortgage boom ending

The mini-boom in demand for fixed-rate mortgages might finally be at end, following the two rate cuts in November and December.

According to ABS housing finance data for November, the proportion of total housing finance commitments taken out at fixed rates increased to 9.9% in October 2011 (from 7.9% in September 2011) as an increasing number of home owners looked to lock in some financial certainty. 

The graph (below) prepared by ANZ and based on the October ABS housing finance data, shows that demand for fixed rate mortgages is at a more than three-year high, with the mini-boom kicking off in early 2009 after the RBA had cut rates by 425 basis points between September 2008 and April 2009 and following Wayne Swan introducing his $42 billion stimulus package in February 2009.

 Source: ANZ

This graph is expected to dip on the back of the two 25-basis-point interest rate cuts in November and earlier this month. All the major banks (with the exception of NAB, which passed on 45 out of the 50 basis points on offer) and the majority of second-tier lenders have passed on to borrowers. 

The impact of lower variable rates has already been seen in November figures from mortgage broker AFG (six weeks ahead of ABS data), with the percentage of fixed rate mortgages processed dropping from 20.4% to 17.2% in the space of a month. 

Damian Smith, CEO of comparison website RateCity.com.au, says the AFG Mortgage Index (which covers one out of every 10 mortgage written) is a “pretty good forward indicator”. 

“We assume that demand for fixed rate loans will start to ease,” he says. 

Smith says a similar trend has emerged in people clicking on fixed rate versus variable rate links on the RateCity.com.au website. 

“As people who click on our site are usually only thinking about buying a property, the clicks are a reasonable indicator of demand two or three months ahead. 

“The relative attractiveness of fixed rates is decreasing,” Smith says, pointing to the fact that fixed rates have dropped substantially less than variable rates over the last 60 days. 

“There has been some small movement in some fixed rates, but no 30- or 40-basis-point cuts,” he says. 

“Over the course of a cycle, consumers are generally better off with a variable rate loan, but there are windows of opportunity for taking out a fixed-rate loan.

“The last window was between August and November, following fixed rates falling very hard over the previous six months. 

“That window is now closed.” 

At the start of December, Mortgage Choice said demand for fixed rate mortgages had peaked after it released November figures showing that 20% of all new loan approvals were for fixed=rate loans, up on the six-month average of 16%, with the 12-month average at 14%. 

The franchise said demand for fixed rate loans doubled over the past year, peaking in November and reaching their highest level since April 2008.

Belinda Williamson, acting head of corporate affairs at Mortgage Choice, says while the franchise group has observed positive momentum in fixed-rate demand over the past six months, “the recent rate cuts and any future cuts due to such factors as increased domestic economic pressures or growing uncertainty surrounding the European debt crisis, may cause the demand for fixed rates to taper off as the gap between fixed and variable rates diminishes”. 

“Although lenders are fiercely competitive for business, industry commentators have suggested current home loan pricing is about as competitive as it is going to get,” she says. 

Smith says consumers might still consider a one-year fixed-rate loan as an alternative to a variable rate loan. 

“There are still some exceptionally cheap fixed rate loans out there,” he says. 

Currently, the cheapest one-year fixed loan is offered by Greater Building Society, which cuts its rate on this loan 5.69% on December 2. 

“There is no chance of getting variable loan at that rate. The lowest would be in the low 6% range,” Smith says. 

“A one-year fixed loan gives you a year’s comfort. It’s not a bad security blanket – it’s highly unlikely you would be worse off.” 

Currently the cheapest variable rate loans are:

Currently the cheapest three-year fixed loans are:

Currently the cheapest one-year fixed loans are:

Source: RateCity.com.au. The above rates are for home loans that are widely available to the general public, ranked by rate and then alphabetically. Rates are accurate as at December 12, 2011 at 4.30pm and are subject to change.