Borrowers not scared of floating loans

FIXED rate home loans are becoming a less attractive option for borrowers as talk of further rate rises by the Reserve Bank dies down.

Borrowers not scared of floating loans

FIXED rate home loans are becoming a less attractive option for borrowers as talk of further rate rises by the Reserve Bank dies down.

The flexibility offered by variable rate loans has traditionally attracted Australian borrowers, with variable rates historically making up about 80 per cent of all mortgages taken out.

But in recent months the take-up of fixed rate loans has increased following a spate of rate hikes by lenders, with borrowers opting to fix the rate on 37 per cent of all home loans that were taken out in February.

By March economists were telling borrowers to expect one more rate hike before the end of the year.

Since then there have been indications the economy has slowed, prompting speculation that the Reserve Bank might not feel the need to raise rates any further. Some economists are saying the RBA’s next move could be a cut in rates – although downward moves are not expected until late next year.

According to broker Mortgage Choice 33 per cent of home loans approved in March were fixed rate loans, down from 37 per cent in February.

Rate changes

Back in November banks were offering fixed rate home loans of between 7.67 per cent and 7.89 per cent – much lower than the 8.32 per cent variable rate at the time.

Today, standard variable rates among the big five banks range from 9.36 per cent to 9.47 per cent. Fixed rates for terms of one to three years range from 8.89 per cent to 9.35 per cent.

Why fix?

Fixing home loans can provide certainty to borrowers worried about future interest rate movements. If they are financially stretched and don't think they could cope with higher home loan costs, fixing their mortgage is one way to provide certainty.

On the downside, if variable rates fall, borrowers who have fixed their loan will be stuck paying a higher rate until the fixed term expires.

Different variables

More borrowers are shying away from basic variable loans, with the take up rate falling to 17 per cent of approvals last month, from a 12 month average of 22 per cent.

Home owners are instead moving into standard variable loans, which offer more bells and whistles along the lines of discounts and more flexibility with repayments. Demand for standard variable home loans rose to 36 per cent of approvals in March, up from a 12 month of 33 per cent.