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The official cash rate is on the way up, and so are the banks’ fixed rates – prompting many advice-based brokers to shun fixed rate home loan products in favour of variable rate products.
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Loan Market Group chief operating officer Dean Rushton says media hype surrounding the RBA’s decision to lift the official cash rate in October – and most recently, on Melbourne Cup day – had prompted a 30 per cent rise in customer enquiries about switching to fixed rates.
But Mr Rushton says despite the sudden jump, Loan Market brokers are advising mortgage holders that moving to a fixed rate now could cost them more in the long run than sticking with a variable rate.
“Variable rates in the mid five per cent have a long way to go to reach the fixed rates currently on offer from the major lenders,” Mr Rushton says.
“We are telling our clients that if you lock in now, you could be paying around 7.5 per cent for the next three years or as much as 8.0 per cent for five years, so it is hard to justify switching to a fixed rate.”
Indeed, many brokers believe that the time to fix was more than six months ago when rates were at their lowest – which was around April this year.
Of the 696 respondents to a June Mortgage Business broker survey, 56.6 per cent said the time for locking in had passed, while 38.5 per cent said there was still time and 4.9 per cent were unsure.
All four majors increased their fixed rate mortgages in the last week of October. NAB was the last to move, raising its one year fixed rate home loan 50 basis points to 6.59 per cent.
Finware director Jason Hayden says with a combined market share of more than 80 per cent, the majors have no reason to keep their fixed rates at competitive lows – although they do tend to keep them in line with the competition.
“Even if one bank moves on fixed rates and the others do not, the market trend is such that three months down the track all the majors will be fairly evenly matched once more,” he says.
While the banks may appear to be responding to official cash rate movements, the RBA’s decisions on the cash rate – while influencing variable rates – have no bearing on fixed rates.
Fixed rate pricing is driven by wholesale money markets, and wholesale funding is currently very expensive and difficult to access.
Mr Hayden says a lender’s fixed rate will fluctuate depending on the cost of funding and how competitive they want to be at any one time in the home loan sector.
“Sometimes, and for whatever reason, the bank may want to write less business, so they hike their rates,” he says.
