Fixed Ideas

If your finances are stretched you may be better off locking in part of your loan, says Michelle Innis.

Two quick rate increases in two consecutive months may be keeping you awake at night. Should you fix a portion of your mortgage, switch to a basic loan or hope that the worst is over?

The official cash rate, the interest rate set by the Reserve Bank of Australia that is the benchmark for all other lending rates, is now at 5.25 per cent after two 25-basis point rises.

"Once the global recovery starts to gain ground, there will be a move to more restrictive monetary policy [or higher interest rates]," says BT Financial Group economist Tracey McNaughton.

BT believes rates will rise again by 25 basis points in February. It has not ruled out one further increase of the same size, but says even if the world economy took off, official rates would be unlikely to rise above 6 per cent.

However, McNaughton points out that consumers have so much debt now that the impact of even a slight rate hike is magnified.

"Interest servicing costs are now matching the peak in the housing boom of the late 1980s," she says. "That's when rates were at 18 per cent."

Australian Bureau of Statistics data shows that fixed home loans as a percentage of total home borrowing have risen each month for the past four months. Fixed loans now represent 12.5 per cent of all home loan borrowing.

InfoChoice spokesman Denis Orrock says fixed rates have been on the move since July, when it was possible to fix for three years below 6 per cent. That rate is now closer to 6.65 per cent.

Fixing for five years starts at 6.99 per cent and rises over 8 per cent, Orrock says. A standard variable home loan is at about 7 per cent, but as low as 5.9 per cent from some smaller lenders (see tables).

"There is merit to fixing a portion of the loan," Orrock says. "Fixing may help you sleep better at night."

AMP Henderson Global Investors economist Bob Cunneen says the RBA may increase rates again in March. But he says that household debt is now 130 per cent of annual disposable income.

"Credit cards, home equity loans, mortgages, are all part of that debt," he says. Any further rate rises will hit very hard.

"If you are sensitive to a rise and don't need a high degree of flexibility in your loan, then lock a portion of it.

"It comes down to the certainty you have with a fixed rate versus the flexibility of a floating rate and your tolerance for risk," he says.

Before committing to a home loan, consumers should check all fees involved, including break costs. If you are splitting your loan you need to check whether that means twice as many fees and charges, and factor that into any potential saving.

TOP PREMIUM VARIABLE
                                Rate%           AAPR true rate%         Total
upfront fees $          Ongoing fees $
Homepath                        5.90            5.90                    Nil
                Nil
Nationwide Mortgage Corp                6.00            6.03
660                     Nil
RESI Mortgage Corp              6.10            6.13                    655
                Nil
Members Equity Pty Ltd          6.24            6.24                    Nil
                Nil
ING Bank                                6.49            6.51
499                     Nil
*AAPR BASED ON $250,0000 OVER 25 YEARS

TOP BASIC VARIABLE
                                Rate%           AAPR true rate%         Total
upfront fees $          Ongoing fees $
Wizard Home Loans               5.89            5.93                    980
                Nil
Homeloans Ltd                   5.90            5.93                    719
                Nil
Heritage B Soc                  6.20            6.26                    600
                5/month
Home Side Lending                       6.26            6.28
500                     Nil
IBM Ltd                         6.45            6.54                    930
                8/month
*AAPR BASED ON $250,0000 OVER 25 YEARS

TOP ONE-YEAR FIXED
                                        Total upfront   Ongoing
                                Rate%   fees $          fees $          Star
rating
Heritage B Soc                  6.39    600             5/month         4
Australian National CU          6.44    800             Nil             2
IMB Ltd                         6.49    930             Nil             3
National Australia Bank         6.50    600             8/month         2
SUNCORP                 6.59    725             10/month                2
AMP Banking                     6.69    600             Nil             1

TOP THREE-YEAR FIXED
                                        Total upfront   Ongoing
                                Rate%   fees $          fees $          Star
rating
Heritage B Soc                  6.90    600             5/month         5
ANZ Bank                        7.15    600             Nil             4
RESI Mortgage Corp              7.15    645.5           Nil             5
Members Equity Pty Ltd          7.29    Nil             Nil             5
Nationwide Mortgage Corp                7.40    660             Mil
5
SOURCE: CANNEX  12/12/03