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Borrowers flock to fixed-rate loans

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  • Borrowers flock to fixed-rate loans

    Borrowers flock to fixed-rate loans

    Richard Gluyas | August 09, 2007

    THE nation's banks will "inevitably" pass on yesterday's rise in interest rates, with an increasing proportion of borrowers likely to fix the rate on their home loans, according to industry experts.

    Harry Senlitonga, an analyst with independent financial research house Cannex, said interest-rate volatility tended to create greater demand for fixed-rate products.

    Relative stability in monetary policy in recent years meant only 25 per cent of Australians had fixed their residential home loans.

    This compared to 85 per cent in New Zealand, which has a long history of volatility in rates.

    "Variable-rate loans will still dominate, but we expect to see more people choosing fixed-rate lending," Mr Senlitonga said.

    "Australian borrowers are beginning to show the level of risk they will cope with, and the trend is towards fixing."

    The nation's banks said yesterday they were reviewing deposit and lending rates in the wake of the RBA's move to lift the cash rate by 25 basis points to 6.5 per cent, the highest level since 1996.

    Spokesmen for ANZ and Westpac said the nation's first interest-rate rise this year would have "inevitable consequences" for the standard variable rate. CBA and NAB said they were reviewing the pricing of their deposit and lending products. Decisions are expected later in the week.

    As with recent interest-rate rises, the foreign-owned banks moved first, raising deposit rates in what appears to be a consistent marketing strategy. BankWest, owned by British lender HBOS, raised the 12-month introductory rate on its TeleNet Saver account from 6.8 per cent to 7 per cent. ING Direct increased the rate on its Savings Maximiser account by 15 basis points from 6 per cent to 6.15 per cent.

    Announcing the rate rise, BankWest retail chief executive Ian Corfield aimed a now customary slap at the bank's big-four rivals, saying Australians deserved a better deal than they had been receiving.

    "We know that many Australians want to save but find it difficult, so we are trying to make it easier for them by offering good interest rates on our deposit accounts and passing on the benefit of the RBA cash rate increase," he said.

    While the proportion of Australians fixing their home-loan rates lags behind New Zealand, it has still risen strongly from 17 per cent to 25 per cent since January last year on the back of four rate rises. Mr Senlitonga said South Australia led the charge, with 35per cent of mortgages fixed.

    "Factors which may influence this trend are higher unemployment levels than other states, and a higher age demographic which is less tolerant of risk," he said.

    "Many people are now using fixed mortgages to hedge against the uncertainty of further rate rises that they fear they will not be able to service on a fixed income. We have also noticed a sharp rise in the use of fixed-rate loans by property investors."

    Another factor driving the popularity of fixed-rate borrowing in NZ is the lower, average three-year fixed rate of 9.14 per cent compared to the 10.22 per cent average variable rate. In Australia, the case is reversed, with the average variable rate of 7.59 per cent equal to a discount of 11 basis points on the average three-year fixed rate.

    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx