Fixed rate mortgages on the way down

Although most economists still forecast a Reserve Bank interest rate rise this year, markets are pricing in a cut in the official rate, which in turn has led lenders to lower their fixed mortgage rates.
Government bond yields in the US, Germany and Australia have been sinking in the past six months as investors, eyeing the ongoing disruptions in the euro zone, fear a halt to the already fragile recovery in the global economy.
Australia's banks borrow and lend at a margin above government fixed rates. With the bond yields dropping, fixed interest rates on mortgages have fallen as well, presenting an opportunity for mortgage borrowers in the current market.

Advertisement: Story continues below

Fixed mortgage rates haven't quite come down this far, but they are at their lowest since October 2009. Photo: James Davies

The average three-year fixed interest home loan is at its lowest since October 2009, at 7.38 per cent, just 8 basis points over the average standard variable rate of 7.30 per cent, according to rate comparison site RateCity.
The five lowest three-year fixed home loan rates
By comparison, in March 2010, three-year fixed loans were 1.32 percentage points higher than the standard variable rate.
The Reserve Bank kept official interest rates on hold at 4.75 per cent yesterday for the seventh consecutive meeting, flagging more concerns about the health of the global and local economy.
Although the scenario for the RBA is that higher official rates will eventually be needed to counter the inflation triggered by the commodities boom, sharemarket wobbles in recent weeks caused by the euro debt crisis have pushed traders to factor in flat or lower rates.
The implied interest rate pricing this morning called for a one-in-10 chance of a rate cut in August, and an interest rate 5 basis points lower in 12 months time, according to Credit Suisse.
ANZ head of Australian economics Ivan Colhoun said the contradiction between economists' forecasts and the market came down to investors placing a small bet on major problems erupting in Europe or elsewhere in the global economy.
"The market will be pricing this mixture of if-everything-goes-right versus the risk that everything-goes-horribly wrong again,'' said Mr Colhoun.
That's why the expectations for the direction of official rates has wavered between positive and negative on the Credit Suisse interest rate market.
Also, the banks' motive to cut fixed interest rates may not be entirely driven by bond prices - but by the ban on exit fees for variable rate mortgages put in force this month.
"The ban on excessive early fees does not include break costs for fixed rate home loans,'' said, RateCity chief executive Damian Smith. "So it's a better deal for lenders to increase their customer base for fixed loans while borrowers could save on interest.''
In any case, the trend of lower fixed interest rate mortgages is clear.
In July, RateCity found 18 out of 100 lenders tracked had dropped their three-year fixed rates, some by as much as 60 basis points.
Volatility in the global market has made predicting the strength of the economy more difficult, said ANZ's Mr Colhoun. For that reason, most economists predict official rate rises to come, even if over a longer period of time that forecast a few months ago.
"With interest rates expected to rise later this year and into next year, it's definitely worth considering a fixed rate home loan while the deals are hot," said Mr Smith.
"Obviously there are always risks in fixing a loan; if rates drop, you will end up paying more than you should, so borrowers should consider their alternatives carefully."
czappone@fairfax.com.au


Read more: http://www.theage.com.au/business/fixed-rate-mortgages-on-the-way-down-20110706-1h1j8.html#ixzz1RJbOVG3o