Borrowers are in a fix on rates

TWO thirds of home owners believe another rate rise will force them to either refinance or sell their homes, a survey shows.

House on paperwork /File

Borrowers are in a fix on rates

TWO thirds of home owners believe if there is another interest rate rise, they will be under extreme stress and forced to either refinance or sell their homes, a survey by Loan Market and X Inc Finance shows.

But now is not a good time to fix your loan unless you are aware of all the penalties, Cannex financial analyst Lauren Newlands warned.

About 30 per cent of those surveyed by Loan Market and X Inc Finance said another rate rise would force them to refinance their mortgages, while another 33.3 per said said that, as they were already at breaking point, they would consider selling up.

Only 17.5 per cent said another increase in interest rates would not be a substantial problem.

Because of the pressure many home owners were experiencing, some might be tempted to lock in their rate.

Rates may still rise, so fixing can be seen as a type of insurance, Ms Newlands said.

But she said that there was a risk for those who want to fix that we were already at the top of the cycle "and it's very likely rates will come down at some stage of the fixed period, leaving you locked into higher repayments''.

People should beware of fixing rates when the rates are already high, she said, even though it's easy to think they they will rise further.

"Fixing is good for people who can't afford another rise, but if they do come down, then they'll find they are paying back their loans at a higher rate than everyone else,'' she said.

Penalty fees

If they decide they will break the loan and get another one at a lower rate, so sell the house and get out of the market altogether, they will find they are paying a heavy penalty - the break cost - which could equal what they would have paid on the loan anyway.

"If the wholesale market for money drops, the lender stands to lose when you want to cancel the loan,'' she said.

"Instead they will calculate what they will lose and make you pay it.''

"The average Australian mortgage is about $250,000, so if the rate drops 2 per cent, the penalty could be about $7000, although this varies, depending on the type of loan.

"There is no foolproof method of calculating this cost, as many other factors are taken into consideration, not the least the wholesale money market which is very volatile and changes virtually on an hourly basis,'' she said.

"So only fix if you are going to sit on the property for a while.''

Early exit fees

Introductory and honeymoon loans also have a penalty for an early exit, she said.

"These rates come at a cost to the lender and they assume they will get repaid with the mortgagee being with them a long time.

"If you don't stay with them, they they will charge you.''

Loan Market and X Inc chief executive Jennifer Nielsen said she believed there was an equal chance of the Reserve Bank raising the cash rate or leaving it unchanged at 7.25 per cent when the board meets again in May.

"We may have gone through an extended period of mortgage love but mortgage stress is taking over and it is not just occurring in isolated pockets,'' she said.

"Severe financial strain is becoming increasingly common and families across the country are really on a knife edge as they wait for the next move in interest rates.''

Refinancing rules, OK?

The percentage of fixed rate mortgages are at record levels with 24 per cent of mortgage buyers picking this form, said Australian Finance Group general manager Mark Hewitt.

Refinancing is also at peak highs, with 39.3 per cent of mortgages to refinance existing properties

This is reflected in the latest AFG Mortgage Index that shows mortgagee sales around Australia have fallen every month this year, compared to 2007

New South Wales is worst affected, with a quarterly fall of 18.9 per cent.

"A sales decline for an entire quarter is unprecedented in our experience,'' said Mr Hewitt.

"There's no doubt the high interest rate regime has already done its work, supporting the Reserve Bank's decision last week not to (lift) rates further.''