The fix is in for loans

Fixed-rate home loans have a reputation for rigidity, but with flexible new features on offer and rates as low as they'll get, now might be a good time to fix at least part of your loan.

"A lot of people have always had a historical bent against fixed-rate loans because of their perceived lack of flexibility, but around 80 per cent of fixed-rate loans on the market now allow borrowers to make redraws or extra repayments," says Denis Orrock, of research house InfoChoice.

As the table shows, some of the best 3 and 5 year rates start at 6.39 per cent per annum (with the Bank of South Australia and HomePath), while the cheapest 1 year rate starts at 6.59 per cent (with the Bank of Queensland).

Even allowing for the fact that few borrowers would be on the 7.32 per cent standard variable rate, fixed-rate loans are still appealing by comparison, Orrock notes.

But if you want to lock in one of these great rates, you'll need to get your skates on. According to John Edwards of HSBC Bank, it is unusual for the fixed rate to be below the variable rate for a prolonged period, and it occurs only because long-term rates are below short-term rates.

"This is a global pattern which is rapidly changing as the US, Europe and soon Japan look to higher short-term rates," he explains.

"Long-term rates are also going up, reflecting both higher short-term rates and more confidence that global expansion will continue.

"Within a year or so and perhaps much sooner I would expect Australian fixed mortgage rates to be again above the variable rate."

Edwards further notes that there is an "increasing chance" that the variable rate will itself increase towards the end of the year.

"This is because the Australian economy is doing well," he says.

"By the second half of this year, the Reserve Bank may become concerned that demand is growing too rapidly for an economy in which unemployment is at a 30-year low, after a continuous expansion of nearly 15 years."

In fact, there are murmurs that another interest rate rise could be as little as a month away, but Craig James, the chief economist with CommSec, also argues any increase will come later rather than sooner.

"We're seeing a bit more movement in the interest rate market than we've seen for a long time [and] borrowers need to be alert to developments," he says.

The beauty of fixed rates right now is that "you can set and forget in the knowledge that what you're paying is relatively low".

The most popular fixed-rate loans are those taken over three years because, as in the Goldilocks tale, says Orrock, this time frame is neither too short, nor too long but "just right", providing borrowers with a sense of security along with a certain degree of flexibility.

"If you're looking to lock in a loan for three to five years, now is the time to do it," James says.

Particularly for overcommitted borrowers who are feeling concerned about their ability to continue making repayments in the event of a rate hike, it can well be worth fixing for some peace of mind.

And if you're not convinced one option over another would suit you best, you can always hedge your bets.

"Nowadays you don't have to be locked into either decision - you can fix 20 to 30 per cent of your loan and go variable with the rest," James says.

In any case, trying to make a decision based on predictions about which way interest rates will go overlooks a very important factor in the equation: one's personal needs.

"It's always more a case of an individual determining what's best for them," James says.

For example, if you have an erratic income stream, you may welcome the certainty of knowing exactly how much you'll have to pay on a fixed-rate loan; while people whose finances are not so tight may be quite comfortable remaining with the variable option.

In the end, there are no guarantees, no matter how much analysis you apply to the problem.

"I'd have to say that in my personal finances I've usually fixed over the past five years, and I've usually lost by comparison with the variable rate," Edwards says.

"I suppose I'm a little bit risk-averse - I'm more bothered by the small chance of a big increase in the variable rate than the small cost of paying fixed. It's a sort of insurance I'm happy to pay."

FIXED RATES 1 YEAR 1yr Compar. Application Service fee Institution Product fixed (%) rate (%)^ fee ($) (p/mth $) Bank of Queensland Fixed loan 6.59 7.36 495 8 Community First CU True Fixed HL 6.6 7.3 500 nil Newcastle Perm BS True Rate HL 6.64 7.04 nil nil Heritage BS Fixed Loan 6.65 7.13 600 5 IMB Fixed Rate HL 6.65 7.32 295 nil ING Bank Fixed Rate HL 6.65 7.18 nil nil NSW Teachers CU Fixed Option HL 6.65 7.18 nil nil Royal Guardian Mort Royal Fixed 6.65 6.73 550 nil FIXED RATES 3 YEAR Bank of SA Stand Fixed Rate 6.39 7.19 600 8 HomePath Fixed Rate 6.39 6.44 nil nil Community First CU True Fixed HL 6.49 7.2 500 nil Easy Street Fin Ser EasyHome Fixed 6.49 6.71 nil nil NSW Teachers CU Fixed Option HL 6.54 7.1 nil nil Adelaide Bank Fixed Loan 6.55 7.21 595* 8 Suncorp Fixed Loan 6.55 7.24 600 10 FIXED RATES 5 YEAR Bank of SA Stand Fixed Rate 6.39 6.43 nil nil HomePath Homepath Fixed 6.69 7.19 350 10 Community First CU True Fixed HL 6.69 7.16 495 8 Easy Street Fin Ser Easyhome Fixed 6.69 7.18 600 8 NSW Teachers CU Fixed Option HL 6.69 6.91 nil nil Adelaide Bank Fixed Loan 6.69 6.6 nil nil Suncorp Fixed Loan 6.69 7.18 600 8 ^ BASED ON $150,000 OVER 25 YEARS *$350 FOR SA CUSTOMERS SOURCE: INFOCHOICE AS AT 6/04/06

26th April 2006

Source:Money Manager