Fix, switch or bitch
Author: Conrad Walters
Date: February 25, 2008
Publication: Sydney Morning Herald (subscribe)
Thousands of home owners will see their house repayments soar from the brunt of six or more rate rises when their fixed-rate mortgages revert to flexible-rate loans this year.
The financial services research group Cannex estimates at least 15,000 home owners signed up for three-year fixed mortgages in 2005 when the average interest rate for a three-year fixed loan was 6.83 per cent.
Variable rates home loans are now as high as 9 per cent, following this month's official interest rate rise of a quarter of 1 per cent.
Harry Senlitonga, a senior financial analyst at Cannex, says repayments on a loan of $250,000 will jump by about $370 a month if a borrower converts to a flexible loan following the latest rise.
Recently the Treasurer, Wayne Swan, announced initiatives to remove barriers such as exit fees that make it difficult for borrowers to change lenders, and which stifle competition.
According to figures from researcher InfoChoice, the gap between three-year fixed mortgages in 2005 and the same loans now could be even higher - an average of 1.81 per cent among the top 10 bank lenders.
As well, banks are likely to continue increasing their own margins independently of the Reserve Bank, says Denis Orrock, the general manager of InfoChoice.
"The banks who increased their rates in early January all indicated the increases were nowhere near the actual increases they're seeing on their funding costs and so that indicated there was more to come."
The Commonwealth Bank put five basis points on top of the Reserve's increase last week, he says: "They're obviously using [the Reserve's] movement as an advantage to filter more through. For borrowers, it's definitely a sign of things to come."
Borrowers should find out whether their fixed-rate loans will revert to a standard variable rate or one of the discounted rates commonly offered to new borrowers.
"They should really be putting pressure on ... to get the best deal they can from their existing lender," Orrock says. Borrowers on a $250,000 loan with a major bank should push for a discount of between 60 and 70 basis points - that is, 0.6 or 0.7 of one percentage point off the standard variable rate.
Most loans have exit fees to discourage borrowers from jumping ship to another bank but Orrock urges consumers to push hard.
"The cost of replacing a loan is far more than extending you a slightly more generous discount," he says, adding that lenders need to meet aggressive internal targets on how many loans they negotiate.
On the tricky issue of whether to renew with a fixed or variable loan, Orrock suggests borrowers ask: "Am I at the end of my pain threshold? If you answer yes to that, definitely take a fixed-rate loan. Give yourself the ability to sleep at night."
Orrock says there may be a further two rate rises this year but the next moves are likely to be down. "If we see a sharp faltering in confidence, it wouldn't surprise us to see a rate cut in late 2008 or early 2009," he says.
Associate professor Steve Keen, an economist at the University of Western Sydney, adds his weight to the view and predicts rates will turn around late this year or soon after.
"Our Reserve Bank is going to have to follow the lead of the Federal Reserve in America and absolutely slash interest rates," he says. "Our economy will almost certainly go into recession in the same way the US is doing exactly that now."
Craig James, the chief equities economist at CommSec, warns consumers against the futility of trying to second guess the Reserve Bank's monetary policy when deciding whether to opt for a fixed or a variable loan.
He says fixed-rate loans are particularly suited to people with a job that may not be sufficiently stable or for workers with temporary or part-time employment. They need the certainty of a fixed-rate loan with unchanging repayments.
"The good news at the moment is there's not a lot of difference between variable and fixed rates," he says.
James also says that, increasingly, consumers are taking out "cocktail" or "split" loans, which allow borrowers to commit part of their loan to a fixed rate and the rest to a flexible rate.
Professor Fariborz Moshirian, who teaches finance at the University of NSW's Australian School of Business, anticipates borrowers will face one or quite possibly two more rate rises this year, each of a 0.25 per cent.
Last month, the major banks lifted their rates independently of the Reserve Bank, arguing that their own cost of funding had increased.
CommSec's James says these so-called out-of-cycle increases could continue.
Martin North, the managing consulting director of Fujitsu Consulting, agrees: "We expect the credit crunch will translate into further out-of-cycle interest rate hikes from the lenders." He anticipates a further quarter per cent rise in the next four to six months.
Fujitsu's Stress-O-Meter, a gauge of consumers' capacity to repay their mortgages, has highlighted the depth of financial pain that exists already.
"About 750,000 people are being caught under some degree of stress at the moment and there are around 300,000 people who are severely stressed," North says, defining severe stress as financial problems that are usually beyond redemption.
View table: Higher loan rates
Compare loans: Use the Loan Comparison calculator to compare any two home loan offers and find out which one will save you the most money.
Should you split your home loan? Work out what your repayments will be if you split your loan between fixed and variable interest rates with the Split Loan calculator.
Author: Conrad Walters
Date: February 25, 2008
Publication: Sydney Morning Herald (subscribe)
Thousands of home owners will see their house repayments soar from the brunt of six or more rate rises when their fixed-rate mortgages revert to flexible-rate loans this year.
The financial services research group Cannex estimates at least 15,000 home owners signed up for three-year fixed mortgages in 2005 when the average interest rate for a three-year fixed loan was 6.83 per cent.
Variable rates home loans are now as high as 9 per cent, following this month's official interest rate rise of a quarter of 1 per cent.
Harry Senlitonga, a senior financial analyst at Cannex, says repayments on a loan of $250,000 will jump by about $370 a month if a borrower converts to a flexible loan following the latest rise.
Recently the Treasurer, Wayne Swan, announced initiatives to remove barriers such as exit fees that make it difficult for borrowers to change lenders, and which stifle competition.
According to figures from researcher InfoChoice, the gap between three-year fixed mortgages in 2005 and the same loans now could be even higher - an average of 1.81 per cent among the top 10 bank lenders.
As well, banks are likely to continue increasing their own margins independently of the Reserve Bank, says Denis Orrock, the general manager of InfoChoice.
"The banks who increased their rates in early January all indicated the increases were nowhere near the actual increases they're seeing on their funding costs and so that indicated there was more to come."
The Commonwealth Bank put five basis points on top of the Reserve's increase last week, he says: "They're obviously using [the Reserve's] movement as an advantage to filter more through. For borrowers, it's definitely a sign of things to come."
Borrowers should find out whether their fixed-rate loans will revert to a standard variable rate or one of the discounted rates commonly offered to new borrowers.
"They should really be putting pressure on ... to get the best deal they can from their existing lender," Orrock says. Borrowers on a $250,000 loan with a major bank should push for a discount of between 60 and 70 basis points - that is, 0.6 or 0.7 of one percentage point off the standard variable rate.
Most loans have exit fees to discourage borrowers from jumping ship to another bank but Orrock urges consumers to push hard.
"The cost of replacing a loan is far more than extending you a slightly more generous discount," he says, adding that lenders need to meet aggressive internal targets on how many loans they negotiate.
On the tricky issue of whether to renew with a fixed or variable loan, Orrock suggests borrowers ask: "Am I at the end of my pain threshold? If you answer yes to that, definitely take a fixed-rate loan. Give yourself the ability to sleep at night."
Orrock says there may be a further two rate rises this year but the next moves are likely to be down. "If we see a sharp faltering in confidence, it wouldn't surprise us to see a rate cut in late 2008 or early 2009," he says.
Associate professor Steve Keen, an economist at the University of Western Sydney, adds his weight to the view and predicts rates will turn around late this year or soon after.
"Our Reserve Bank is going to have to follow the lead of the Federal Reserve in America and absolutely slash interest rates," he says. "Our economy will almost certainly go into recession in the same way the US is doing exactly that now."
Craig James, the chief equities economist at CommSec, warns consumers against the futility of trying to second guess the Reserve Bank's monetary policy when deciding whether to opt for a fixed or a variable loan.
He says fixed-rate loans are particularly suited to people with a job that may not be sufficiently stable or for workers with temporary or part-time employment. They need the certainty of a fixed-rate loan with unchanging repayments.
"The good news at the moment is there's not a lot of difference between variable and fixed rates," he says.
James also says that, increasingly, consumers are taking out "cocktail" or "split" loans, which allow borrowers to commit part of their loan to a fixed rate and the rest to a flexible rate.
Professor Fariborz Moshirian, who teaches finance at the University of NSW's Australian School of Business, anticipates borrowers will face one or quite possibly two more rate rises this year, each of a 0.25 per cent.
Last month, the major banks lifted their rates independently of the Reserve Bank, arguing that their own cost of funding had increased.
CommSec's James says these so-called out-of-cycle increases could continue.
Martin North, the managing consulting director of Fujitsu Consulting, agrees: "We expect the credit crunch will translate into further out-of-cycle interest rate hikes from the lenders." He anticipates a further quarter per cent rise in the next four to six months.
Fujitsu's Stress-O-Meter, a gauge of consumers' capacity to repay their mortgages, has highlighted the depth of financial pain that exists already.
"About 750,000 people are being caught under some degree of stress at the moment and there are around 300,000 people who are severely stressed," North says, defining severe stress as financial problems that are usually beyond redemption.
View table: Higher loan rates
Compare loans: Use the Loan Comparison calculator to compare any two home loan offers and find out which one will save you the most money.
Should you split your home loan? Work out what your repayments will be if you split your loan between fixed and variable interest rates with the Split Loan calculator.