Australians rush to ‘fix’ mortgage rates during coronavirus crisis

The exit of investors means that first home buyers have returned to prominence, taking more than 20 per cent of all new mortgages. Picture: iStock

Australians have rushed to “fix” their mortgage rates during the pandemic crisis with the portion deciding to lock in rates at current levels nearly tripling to a record-breaking 40 per cent, Commonwealth Bank has reported.

The extraordinary shift in borrowing patterns at the nation’s largest home lender is expected to be matched across the sector as fixed rates are often lower than variable rates at present.

With rates at record lows, many homeowners are clearly seeking security in knowing in advance how much they will have to pay each month in the years ahead.

Meanwhile, the banks are able to keep the fixed rates at very low levels thanks to emergency monetary policy settings from the Reserve Bank of Australia that are funding our banking system.

“It’s more than a spike in fixed rate applications,” says Stephen Halmarick, chief economist at the Commonwealth Bank. “It’s deeper than that - there is an expectation that monetary policy will be at these settings for some time to come.”

Australian investors and home owners traditionally used variable rates, which historically had lower headline rates and allowed borrowers to pay off the loan faster if their financial situation improved.

But the long decline in interest rates experienced in the local market has prompted a major shift which brings the Australian system into line with overseas markets, such as the US and continental Europe, where long-term fixed rates are more common.

Fixed rate investors were still running at just 14 per cent of all borrowers as recently as early March.

Banks have also made fixed mortgages more attractive in recent years, allowing flexibility around repayment arrangements compared to earlier offerings that had rigid rules and steep penalties for those who tried to repay before the fixed term ended.

Financial advisers have more regularly put forward fixed interest mortgages as an option this year on the basis that the rate cycle might be close to bottoming out.

However, advisers suggest borrowers should only fix if they wish to have a smooth predictable payment pattern. Advisers warn that aiming to beat the bank in terms of timing rate moves rarely works for retail investors.

The dramatic shift to fixed loans comes as the banks aim to win over the first home buyer market, which has emerged as the key segment in a weak residential property market.

The exit of investors means that first home buyers have returned to prominence taking more than 20 per cent of all new mortgages.

Industry analysts also suggest the prevalence of housing grants - especially the federal government’s new HomeBuilder program - has awoken the first home buyer market despite the difficult outlook for both employment and economic growth..

Though the numbers have yet to come through in terms of significantly higher home loan approvals or commencements, the early factors such as home loan applications and internet searches are showing a strong uptick across the banking system.

“People are seeing these very low fixed rates - often just a little over 2 per cent - at major banks and no wonder they are attracted. In turn, the banks have the comfort of knowing what monetary policy is very likely to be for a long period of time,” says Steve Mickenbecker, group executive financial services at research agency Canstar.

With RBA policy now underpinning solid funding to the banks there is - in theory - little restraint in the availability of credit, however the wider market is very soft with further falls in residential property prices expected over the rest of the year.