Fixed-rate mortgages close in on variable rates

Mortgage lenders continue to entice borrowers with cheaper fixed-rate products.

The average three-year fixed mortgage rate is now only five basis points higher than the average standard variable rate, according to research by comparison website RateCity.

Lenders cut their fixed-rate products by a further three basis points on average in July 2011.

Across its database of around 100 lenders, RateCity has calculated that the most common fixed term chosen by borrowers is 7.35%, with the average standard variable rate 7.3%.

Some lenders are offering fixed-rate mortgages at rates lower than the benchmark standard variable rate of 7.8%, the average rate of the four major banks.

These include Citibank, which lowered its three-year fixed rate by 33 basis points on July 18 to 6.99%.

ANZ lowered its three-year fixed rate by five basis points to 7.19% on July 16, and a week earlier NAB dropped its three-year fixed rate by 15 basis points to 7.24%.

RateCity’s average fixed rate movements since January 2011

 

1-year fixed

2-year fixed

3-year fixed

4-year fixed

5-year fixed

January 1, 2011

7.10%

7.33%

7.43%

7.80%

7.89%

July 18, 2011

7.07%

7.22%

7.35%

7.71%

7.81%

Difference

- 0.03%

- 0.11%

- 0.08%

- 0.09%

- 0.08%

Source: RateCity

The popularity of fixed interest rate home loans hit its highest level in five months in June 2011, reaching 12.3% of all approvals, according to mortgage broker Mortgage Choice.

RateCity CEO Damian Smith says the gap between the average three-year fixed-rate and standard variable rate hasn’t been this tight for at least the past two years.

“Some fixed home loan rates have actually been falling for some time. Average three-year fixed rates dropped during 2010, and we’ve seen them fall by eight basis points this year to a new low of 7.35 percent on average.”

Smith says variable rate customers paying 7.3% should be talking to their lenders about getting a better deal.

“On average over the interest rate cycle, the best strategy for most borrowers is to find the lowest variable rate and make the highest possible monthly repayments. But when fixed rates are this close to variable rates – which happens relatively rarely – there’s good reasons to think about fixing,” he says.

“One option that hedges your bets on the direction of rates is to look at a split loan – for example, fixing 50% and having the other 50% variable.”

However, should Westpac forecasts of a 100-basis-point cut in the cash rate by 2013 prove accurate, many fixed-rate borrowers could be worse off than those with variable rate mortgages in a year and a half’s time.

However, Smith says most commentators are still sticking with the Reserve Bank’s formal view – which is that rates are likely to rise over the next 12 months.

“Borrowers really shouldn’t get too excited at this stage, and should be looking to reduce home loan debt with additional repayments where possible,” he says.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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