Tuesday, January 17, 2012

Mortgages. Why we're fixing.

Financial markets are banking on at least three more rate cuts over the next six months, but an increasing proportion of home borrowers appear not to care.

The latest borrowing figures for November - compiled just after the first of the two end-of-year rate cuts - show a jump in the proportion of borrowers locking in their repayments at fixed rates for two or more years.

Fixed loans climbed from 10.6 per cent of new housing loans before the November cut to 11.1 per cent, the highest proportion since the financial crisis in 2008.

A separate count by mortgage broker AFG backs up the Bureau of Statistics finding and suggests the trend continued beyond November.

In December 19.2 per cent of AFG loans were issued at fixed rates, up from 8.2 per cent six months before.

UBS interest rate strategist Scott Haslem says the uptake of fixed loans isn’t as pessimistic as it might seem...

“It doesn’t mean people think rates will rise and it doesn’t even mean they don’t expect them to fall again,” he told the Herald. “It’s just that fixed rates have become better value - it’s becoming cheaper to grab the bird in the hand.”

As recently as June last year a typical fixed three-year mortgage charged 7.35 per cent. By November the rate had fallen to 6.4 per cent.

“The decision facing a borrower in November was whether to go for a fixed loan at 6.4 per cent or whether to take out a variable loan that had just fallen from 7.55 to 7.3 per cent and might fall further.”

“You would have to expect four more rate cuts over three years to make the variable rate look better than fixed, and even then you would have to expect the lower variable rates to hold for three years.”

Mr Haslem said the low fixed rates were not particularly expensive for banks to fund. The three-year bond yield has fallen to 3.1 per cent.

“Everybody seems to be cutting global interest rates because the global economy is going through problems. Banks are able to cut their two to three year loans because the cost of two to three year money has gone down.”

The number of new home loans to owner occupiers jumped 1.4 per cent in November. Excluding loans for refinancing new loans climbed 2.5 per cent. But the number of new loans for home construction fell for the third successive month, sliding a further 0.4 per cent.

“Real estate agents will love the fact that more people are interested in established properties,” said Commonwealth Securities chief economist Craig James. “But builders, tradespeople, building material suppliers and homemaker stores will be more concerned about the absence of those wishing to build.”

“Home buyers are actually pretty cautious. The proportion of loans approved but not taken up has climbed 11 per cent over the past year. Buyers are getting their finance in place then waiting.”

Much of the November bounce was in NSW spurred on by the stamp duty concession for first home buyers which expired in December. First home buyers made up 24 per cent of new NSW loan approvals compared to 20 per cent nationally.

Other figures released yesterday built the case for further rate cuts. The TD Securities inflation gauge climbed 0.5 per cent in December but recorded the weakest quarterly growth in three years. TD Securities is forecasting an underlying quarterly rate of just 0.2 per cent when the official figures are released next Wednesday.

Published in today's SMH and Age

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