Get ready for a fixed rate mortgage boom

Fixed-rate loans dominate the UK mortgage market, accounting for around 90% of home loans. By comparison, 70% to 90% of property borrowers in Australia opt for variable interest rates.

However, National Australia Bank CEO Ross McEwan believes that the trend toward fixed-rate loans will continue to gather pace and they may soon account for about 30% of the local mortgage market.

This comes as Australia’s major banks are under scrutiny after reducing interest rates for fixed home loans and leaving variable rates unchanged following the Reserve Bank of Australia’s (RBA) latest official interest rate cut.

From The Australian:

“It [fixed rates] could be more than 30 per cent (across the banking sector) … but I wouldn’t fear that”…

“The reality is that this market is moving more toward fixed rates for certainty, it was about 10 per cent of the (NAB) book I think you’ll see it quite quickly getting to 30 per cent … we are seeing that in the (new mortgage) flows”…

NAB has the lowest four-year fixed rate among its main rivals. That is after it announced an 81 basis points cut to its four-year fixed mortgage rate to 1.98 per cent per annum.

Significant growth in fixed rate mortgages is a certainty.

The RBA’s indicator lending rates for October revealed that the gap between average discount variable mortgage rate and the 3-year fixed mortgage rate had ballooned to 1.26%:

The major banks passed this week’s 15 basis point reduction in the RBA cash rate on to fixed rate mortgages, but left variable rates unchanged. Therefore, the gap between fixed and variable rates has widened even further.

With fixed mortgage rates below 2% available from some lenders, borrowers would be crazy not to take advantage.

Unconventional Economist
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Comments

  1. On face maybe. But don’t forget the comparison rate (i.e. headline rate after fees). ING has 2.19% fixed, but once you account for fees it;s over 3%. There’s $700 in fees just for the pleasure of setting the fixed rate and then $300 per year ongoing fee for their fixed product. And extra yearly repayments can;t exceed 10k. None of that in the variable and the variable comes with an offset, which makes a big difference for those with cash and spending discpline.

    Devil is always in the detail…

    • The90kwbeastMEMBER

      Comparison rates assume a mortgage balance of $150k. What is this, 1997? Many in Sydney & Melbourne have mortgages >$500k, with many more approaching $800k. The comparison rate methodology could use a good update to stay relevant.

      For the overwhelming majority with larger mortgages the interest rate is all that matters and still delivers massive savings, not whether you are paying $300 a year in fees.

      • True – once the loan balance increases the set up fees become less important. However, you still have the ongoing yearly fees, cap on extra repayments and no offset facility. Once you do the sums on that, variable starts looking a lot more attractive than the headline differences would imply.

        • The90kwbeastMEMBER

          I would also argue if you are staying with the same bank, comparison rates also don’t make sense because it includes establishment fees, valuation fees, a whole host of fees you only ever pay once with your bank on fixed rate loans which make the comparison rate look artificially high.

          My plan is to stay with my current bank and just jump back & forth between fixed & variable per my post below, repay the extra in the variable window and so on. My bank only changes $200 establishment fee then that’s it each fixed term period.

          Offset I personally don’t need and with rates close to 2%, does anyone really need it? Either pay off the loan or invest your money elsewhere.

          The bottom line is, fixed rate offers the majority of customers a better deal than variable – but agreed, only if you aren’t getting shafted on all sorts of fees.

    • happy valleyMEMBER

      And ING as an online-only bank should have lower costs and be able to offer better term deposit rates than branch banks, but all their term deposit rates for 12 months or less are 0.4% pa or much and mostly at 0.2% – 0.3% pa. Pfft – off memory, the ING Dutch parent had to be bailed out in the GFC. Have pulled all funds from ING – may as well let another bank screw me. Anyway, based on your above true fixed loan rates and their sh.t term deposit rates, their NIM is looking very healthy?

  2. Ukraine fnMEMBER

    The problem with our fixed rate mortgages is that you are very restricted in making additional payments and the longest term is four years. This is why the banks are reluctant to change variable rates (cash cow) and the only way for them to make some sought of return, as their other products (personnel loans, credit cards etc) have nowhere near the take up they use to get.
    Plus the indebted are deleveraging as fast as they can.
    Sorry just have seen your post Empire and exactly.

  3. Jumping jack flash

    Well it could go either way.
    If they manage to jump start the Debt Engine of the New Economy then they may well freak out like they did back in 07, raise rates and cause another GFC.
    “I can’t believe its finally working, quick stop it!”

    But then again they *really* need the inflation this time so maybe they wont be so quick to step on it?

    Because once the debt starts growing at the correct rate and the feedback loop kicks in, we’ll finally get wage inflation and CPI will rocket. It wants to so badly, its just impossible right now because there’s too much debt that isnt growing fast enough.

    The underlying mechanism is that everyone needs more debt all the time to live at their expected standard, and that needs higher wages, which needs higher prices. The problem is that debt isn’t free and never will be, but if it grows at the right rate it may as well be.

    • Jumping jack flash

      It all depends on the margin.
      The margin has been widening for quite some time.
      Once NIRP is implemented then the cash rate can be set to whatever is required to produce the correct amount of margin to get mortgage rates the next step lower when required.

      Mortgage rates can never be negative of course, but they can certainly be less than 1%. Less than 0.1%. It depends on the margin.

      Then again, it may not be necessary to continue to lower rates if they can get the Debt Engine working. All recent signs point to it firing up for the first time since 2006. Whether it keeps running is anyone’s guess.

      It is only because the debt wasn’t growing fast enough for 10 years that rates were systematically lowered every few months over the same period.
      Phil has had enough. It is way beyond a joke now. He also is deathly afraid of NIRP.

      • happy valleyMEMBER

        I think some Scandinavian banks or other financiers have negative mortgage rates, and as for Captain Phil NIRP would be economic orgasm 101 so I think it’s just a matter of time for our RBA happy clappies.

  4. Anybody else see the parallels to adjustable ‘teaser rate’ mortgages in USA that helped fuel the GFC? I understand we’ve always had fixed rate mortgages, but their appeal has tended to be certainty rather than a cheaper rate.

    Sure, variable rates will *probably* still be very low when fixed rate period lapses, but how many will be able to meet their obligations if they aren’t?

    I presume the TFF would simply be extended if this looked like a problem.

      • I don’t want to take it anymore
        I’ll just stay here locked behind the door
        Just no time to stop and get away
        ‘Cause I work so hard to make it every day

        Whoo oooh
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        There’s no money falling from the sky
        ‘Cause a man took my heart and robbed me blind
        Someone stole my brand new Chevrolet
        And the rent is due, I got no place to stay

        Whoo oooh
        Whoo oooh

        And it’s hard to say
        Just how some things never change
        And it’s hard to find
        Any strength to draw the line
        Oh I’m just burning doin’ the neutron dance
        I’m just burning doin’ the neutron dance

        Industry don’t pay a price that’s fair
        All the common people breathing filthy air (Lord have mercy)
        Roof caved in on all the simple dreams
        And to get ahead your heart starts pumping schemes

        And it’s hard to say
        Just how some things never change (hey, hey)
        And it’s hard to find
        Any strength to draw the line (whoa oh)
        I’m just burning doin’ the neutron dance
        I’m just burning doin’ the neutron dance

        Whoo oooh
        Whoo oooh

        I’m on fire, yeah
        I’m on fire, yeah

        And it’s hard to say
        Just how some things never change
        And it’s hard to find
        Any strength to draw the line
        I’m just burning doin’ the neutron dance
        I’m just burning doin’ the neutron dance

        I know there’s a pot of gold for me
        All I got to do is just believe
        I’m so happy doin’ the neutron dance
        And I’m just burning doin’ the neutron dance
        I’m so happy doin’ the neutron dance
        I’m just burning doin’ the neutron dance

        Whoo oooh
        Whoo oooh

        I’m so happy doin’ the neutron dance
        And I’m just burning doin’ the neutron dance (yeah, yeah)
        Whoo oooh
        Whoo oooh
        I’m so happy (it’s in my hands)
        I’m just burning (it’s in my feet)
        I’m so happy (it’s all over me)
        I’m just burning (I can’t help myself)
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        I’m just burning (oh, yeah)
        I’m so happy (oh, yeah)
        I’m just burning (I’m just burning)
        I’m so happy (oh, yeah)
        I’m just burning (it’s in my feet)
        I’m so happy (it’s in my hands)
        I’m just burning (it’s in my feet)
        I’m so happy (it’s all over me)

  5. What this also does is shifts the risk back to the bank
    If banks don’t swap out their fixed rate exposure they’ll get caught in serious financial stress
    When variable the risk is with the customer

    It’d be good for customers if they could lock in for 30 years like USA

    Then I’d say to you Reusa find a good home in a good area and don’t worry

    Locking in at 1.99 for 2/3 years id say is one of the biggest risks you can take

    • ‘It’d be good for customers if they could lock in for 30 years like USA’

      This!
      Really a scandal that Owner Occupiers cannot do this.
      Absolutely obscene bankers get away with this debt noose in Australia.

    • The90kwbeastMEMBER

      “Locking in at 1.99 for 2/3 years id say is one of the biggest risks you can take”

      Do you just make up garbage for the hell of it when you post on this blog…

      • 90k
        You obviously don’t have that much experience ok life

        If you don’t understand that entering into a 30 year contract of a huge amount of debt based on the assumption and servicing at 1.99.% for a fixed term with 28 years to run then you have no idea, what if rates in 2 years time are 6%
        Your rate automatically increases to 6%
        Do you not understand the consequences???

        The ideal and lowest risk is to have a fixed rate for the entire term of the contract

        Can you imagine what’s going to happen to these mortgage holders when the fixed term expires

        Rates won’t be 1.99%

        It is huge risk and most don’t understand what they are getting themselves into

        To make that comment illustrates you aren’t very smart

        • The90kwbeastMEMBER

          I have more than enough experience to conclude that the exact sentence you stated is just not true.

          If you truly think that fixing your mortgage for 2-3 years is one of the biggest (financial) risks you can take, it is you who lack the experiences required to correctly form that conclusion. Sure mortgages rates might be 6% in 2 years time. I assess that as a 5% probability. You seem to assess it as a 70% probability. And even if mortgage rates are 6%, your options in Australia are variable (screwed), 5 year max fixed rate (coming off which you’re screwed).

          Everything you post about is total uber bear, doomsday hogwash.

          • Let me explain more clearly my comment

            There are many first home buyers going to a mortgage broker and getting maximum borrowing based on 1.99%.
            The current variable is 3.5%
            Back before GFC banks sold heavily these 1 and 2 year introductory rates to entice
            This 1.99% is not a real interest rate it’s a honey moon rate to suck people into borrowing
            So if variable is 3.5% it’s not hard for that rate to get back to 6% and these unsuspecting people will be in a very serious position
            1.99% is a honeymoon
            If you are an existing borrower that can handle 5% it’s great
            It’s borrowers who aren’t at all factoring in higher rates
            Yes I maybe an extreme bear
            But in this example, your 5% chance of 5 to 6 % rates in 3 years is a serious underestimate
            We face future inflation
            5 to 6.% interest in 3 years are more than 50% chance
            Genuine you are seriously underestimating rising interest rates

  6. banks are just defending margins on variable rates and allowing competition to manifest in fixed rates.
    fixed rates are great for me. offset means nothing as I dont have IPs are and just redraw as requred.
    I am not in a position to make massive additional repayments but to the extent I think I an repay early, I just have a variable tranche.

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