April 2009 Survey - Home loan rates: Where are they headed?

We asked our panel of Australia’s leading economists and mortgage industry experts where they thought the average standard variable rate would be at the end of July 2009, and whether borrowers should consider fixing or staying variable. After recent rate cuts by the RBA and major lenders, we calculated an average standard variable rate of 5.82% as at April 2009. These predictions by no means reflect where the rates will be for the banks or other lending institutions surveyed, and are instead intended as a guide. Forecasts may have changed since the survey was taken on 8 April 2009.

 

The expectation is that the cash rate will be cut by 50–75 basis points over the coming months, taking the average standard variable rate to 5.2% by the end of July this year.

How low variable interest rates actually go largely hinges on the economic data coming through over the next quarter – unemployment figures in particular.

Another thing to watch will be the May budget, with the expectation that if the boost to the First Home Owner Grant is not extended then the RBA will need to make further adjustments to the cash rate that may not otherwise have been necessary. Many consumers are unaware that the variable rates move differently to fixed rates and by the time variable rates have bottomed they have missed the best opportunity to fix.

While the RBA is expected to keep reducing the cash rate this year to record lows, fixed rates are already moving up. If you are able to secure a great fixed rate in the high 4.0% or low 5.0% range for a three to five year period, and the loan terms, conditions and features are suitable for your situation, then you should seriously look at it.

This could be particularly attractive if you are in need of some certainty about your repayments in the near term. A combination of part variable/part fixed gives flexibility should rates drop further than anticipated”
John Kolenda, executive director, Loan Market Group

Where will the average standard variable interest rate be by the end of July 2009? And should borrowers consider fixing or stay variable?

“I recommend borrowers stay variable until rates get to 4.82% then split. Borrowers should always only fix at the bottom of each cycle. We expect more rate cuts are in the pipeline. A 4.00% standard variable is not out of the question”
Gino Marra, CEO, Carrington National

“I predict the average standard variable rate will be 5.55% (with an RBA cash rate of 2.5%) by the end of July 2009. I’d suggest consumers wait until later in the year before they fix their loans. The reasons for this are threefold. Firstly, we’re still unsure where this global financial crisis is heading. Secondly, there will be further drops in interest rates over the coming months. Thirdly, I think the cost of funds to Australian banks will ease in the future once confidence returns to the banking and finance industry. This will mean that the average variable rates of banks will more closely resemble the RBA cash rate”
Peter Koulizos, Coordinator, Property and Share Investment

“The RBA’s comments following the April rate drop signalled that further tightening of the economy is expected, with a corresponding drop in inflation due to reduced demand. This has left the door open for further economy-stimulating overnight cash rate adjustments (down) if required. Depending on applicant needs, I often recommend basic variable rate loans, splitting the total amount into two variable portions. I recommend this not only because variable rates are lower than current available fixed rates, but because variable also allows you to take advantage of further rate drops. Because the loan is split into two variable components, one of these can easily be switched to a fixed rate later in the year if/when rates appear to begin moving up. The remaining variable split will retain the ability to make voluntary repayments. Should a lender offer a hot two or three-year fixed rate (i.e. 4%pa), then take advantage of that. As always, think through your financial plans for that term, and if in doubt, speak with your mortgage adviser”
Martin Castilla, personal mortgage advisor, Smartline

“Remain variable for one more quarter then shop around for a fixed rate; interest rates may bottom out soon”
Ken Sayer, Managing Director/CEO of Mortgage House

“Given the current attractiveness of fixed rates, it may suit some borrowers to ‘take out insurance’ by fixing at least part of their loans”
Chris Caton, chief economist, BT Financial Group

“Interest rates are coming to the end of a downward cycle, so it would be prudent to wait until we realise some stability in standard variable rates before fixing your loan. Enquiries for fixed rates are increasing as rates reach 45-year lows, with consumers looking to avoid the next high rate cycle. If you are considering fixing your loan, ensure you are comfortable with all the conditions associated with the new contract, and remember with fixed rates either the customer or the lender will lose! As we have always said, consider a split loan option to give you the best of both worlds if fixing is important to you, this will give you the certainty of a fixed rate and the flexibility of the variable”
Lisa Montgomery, head of marketing and consumer advocacy, Resi

“Every consumer’s personal situation differs; therefore it is important to discuss individual needs with a professional broker before locking into a fixed rate.

Bearing this in mind, we expect rates to fall further during the latter part of 2009, therefore suggest staying with SVR for the time being”
Darryl Simms, managing director, Access Loans P/L

“While interest rates may go a bit lower yet, we are close to the bottom so it would wise for consumers to start fixing a portion of their loan leaving scope to do more over the next six months”
Shane Oliver, head of investment strategy and chief economist, AMP Capital Investors

“Borrowers should not be fixing their loans as yet, but I would be considering it by August/September 2009 based on the outlook for the economy at that time.

When you do decide to fix your loan, consider fixing different portions as a sliding hedge. For example 25% of your loan fixed for 15 years, 25% fixed for 10 years, 25% for 5 years, and the rest variable. From my example you can see that you can easily take other positions based on how the economy may look. If you feel that rates will not rise significantly then you may prefer hedging your rates based on the following: 15% of your loan fixed for 15 years, 25% fixed for 10 years, 35% fixed for 5 years, and 45% variable. On the other hand, if you felt interest rates may rise significantly over time you may use the following percentages: 45% of your loan fixed for 15 years, 35% fixed for 10 years, 25% fixed for 5 years, and 15% variable.

This method gives you quite a bit of flexibility, and as each portion of your fixed loan expires you can roll over the portion into another fixed loan, or vary the percentage, by adding or subtracting funds to the variable portion”
John Smith from Inspired Finance Group