Why are variable loans back with a vengeance?

It’s the exact opposite of what an economist might expect — logic suggests you might “fix” before rates start moving high.

As bank mortgage rates start to rise from the rock bottom levels of recent years, homeowners are moving away from fixed rates and back to variable loans with a vengeance.

It’s the exact opposite of what an economist might expect — logic suggests you might “fix” before rates start moving high. But households — possibly influenced by unchanging official rates — are actually fixing less.

In fact the demand for fixed rates has fallen for eight months in a row, according to mortgage broker Mortgage Choice.

The broker says the latest national home loan approval data has revealed that variable rate mortgages accounted for 82 per cent of all loans written in May, up by 2 per cent from the previous month — and almost 7 per cent higher than the 12-month average.

Steve Mickenbecker, group executive financial service at comparison website Canstar, says: “It’s still a nice time fix, when you look at interest rates they are still low. But that’s not what we are getting … unfortunately we often find people don’t really start fixing until the rate cycle has peaked.”

Standard variable rates (owner occupier principal and interest) are now averaging close to 4.5 per cent.

However analysts in the sector suggest the latest upward moves in mortgage rates from Macquarie Bank, Bank of Queensland and other regionals is only the beginning of what may become a gradual upward movement in both official cash rates and mortgage rates.

The official cash rate, at 1.5 per cent, has not changed in almost two years but research houses such as Lonsec believe the “normal” cash rate under the conditions we are now seeing in wider markets could be twice as high, as 3 per cent. Under that scenario standard variable

mortgage rates would move closer to 6 per cent.

Investors — who have substantially withdrawn from the market in recent months — will always pay a higher rate. Investor rates are generally about 0.5 per cent above owner occupiers.

Though none of big four banks has yet announced what have become known as “out of cycle” rate increases, brokers believe it is only a matter of time.

There has been speculation in the market the big four are worried about a political backlash if they increase rates against the backdrop of a royal commission into banking. However Citi suggests the bigger banks could be accused of squeezing regional competitors if they do

not follow soon.

In a recent report Citi suggested: “The major banks will be conscious that if they don’t reprice, they may be perceived as using their considerable size and diversification to squeeze their smaller competitors.”

As demand for fixed rate loans fell for the eighth month, the Australian Bureau of Statistics data for April also showed the number of first homebuyer commitments, as a percentage of total owner-occupied housing finance commitments, rose to 17.6 per cent in April 2018, up from 13.7 per cent in January 2018.