Fixed interest rates tempting borrowers as bank compete for business

By Bob Wilson, 10th October 2011

The Reserve Bank may be keeping a lid on the official cash rate – 11 months without a change – but many financiers are ignoring the trend and pushing their own home loan rates down to win new customers.

The fixed-term interest rate is the main arena for this competition. Since August more home loan lenders have been offering fixed-rate inducements to borrowers. Some are offering almost 1% below the prevailing variable rate.

RateCity confirms the latest deals, with AMP leading the way (offering one, two and three-year fixed rate at 6.29%). The “comparison” rate (variable) ranges from 6.63% to 7.6%. RAMS is offering a two-year fixed rate at 6.35%, when most lenders are charging at least 7% for variable home loans.

There are plenty more examples of home loan lenders slashing their fixed rates as expectations of an official rate rise have waned. ING Direct, for example, cut its three-year fixed rate home loan to 6.29% and cut its four and five-year fixed rates to 6.59% and 6.69%. ING Direct spokeswoman Lisa Claes says ING made the recent cuts to maintain its competitive position in a very active market.

Some of the major banks have also joined this trend, led by Westpac-owned St George Bank which reduced its three-year fixed-rate home loan by 0.15% to 6.39% and its two-year fixed-rate loan by 0.5% to 6.39%. Not to be outdone, Westpac reduced its three-year fixed rate loan by 0.15% to 6.44%.  NAB dropped the rates on its entire range of fixed-rate products by as much as 0.15% (its two and three-year rate fell to 6.39% and 6.44% and its one-year rate to 6.34%).

There is a school of thought among economists that sticking with a variable rate for the life of your home loan will save money in the end, rather than switching back and forth to fixed rate loans as times dictate. One of the reasons for this is that financiers are always “tweaking” the variable rate market.

Leading broker Mortgage Choice observes that while fixed rates are falling, many lenders are also offering a range of variable rate discounts. These can include waiving entry and exit fees and offering introductory rates. A search of RateCity’s website reveals there is a choice of 19 different variable rate loans, offering rates between 6.68% and 6.97%, so the battle is on in this arena also.

Mortgage Choice spokeswoman Kristy Sheppard says existing borrowers should note that many are renegotiating the interest rate on their existing loan. There is room to bargain between the existing lender’s customer retention department and the incentives offered by competitors to switch lenders.

“Potential borrowers will be pleased to know we’re seeing more lenders accepting lower deposits, taking rental income as evidence of genuine savings, relaxing restrictions around the property size they will approve a home loan for, and more,” she says.

Mortgage sales reached $2.7 billion in August, according to mortgage broker AFG. The Australian reported that 38% of all mortgages sold in August were due to refinancing – in short, borrowers playing the competitive home loan market. For all that, only 9.4% of all loans written were fixed rate (up from 7.9% in July).

Whatever else they do, borrowers considering making a switch should carefully check out the cost of fees and charges. While many lenders offer fixed-rate loans with no application fees, other charge between $350 and $600.

The good news is that as of July this year Australian home loan lenders cannot charge customers early exit fees. But there are still a range of fees that a borrower may have to pay to switch loans including a discharge fee from the existing lenders, plus an application fee or upfront costs by their new lender (and government charges).

ENDS

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