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| Fixed Mortgages |
Fixing the mortgage interest rate may be a smart move if, as economists expect, the cash rate moves higher by the end of the year. If they are right and the cash rate is 0.5 percentage points higher by Christmas, borrowers with a $450,000 mortgage will have to find an extra $132 a month in repayments.
Price rises are also putting household budgets under pressure. While the prices of electronic goods have come down, prices of essential items have risen strongly. Electricity costs rose 12 per cent over the past calendar year, fresh food and vegetables were almost 8 per cent higher and petrol prices rose by 5 per cent.
While not much can be done to protect against price rises on essentials, those with variable-rate mortgages could take out insurance against rising interest rates by fixing their mortgage rate.
The standard variable rate from the big banks is 7.8 per cent (see Canstar Cannex's figures below). But that is just the advertised rate and many of those with variable-rate mortgages are paying up to 0.5 percentage points below the standard variable rate, or about 7.3 per cent.
The big four banks have fixed-rate mortgages for one and two years of between 6.99 per cent and 7.29 per cent. Fixed rates of less than 7 per cent for one and two years are available from other lenders.
''There is a big variation in lenders' interest rates,'' Andrew Willink, the founder of financial products comparator Canstar Cannex, says. ''The gap between the highest and the lowest is still very high.''
Willink says even those mortgage holders with big mortgages who do not have a view on the direction of interest rates should consider splitting their mortgage 50:50 between variable and fixed. That way, regardless of what rates do, borrowers will never be more than half wrong.
Rate Rise
Natural disasters, both here and overseas, have delayed the next rate rise - but rise it will, economists say. They say the cash rate is likely to reach 5.25 per cent, from the present 4.75 per cent, by the end of the year, with variable mortgage rates rising to more than 8 per cent.
When the Reserve Bank board meets on Tuesday, it is likely to again stay on the sidelines, the chief economist at AMP Capital Investors, Shane Oliver, says.
The floods and cyclone in Queensland will put a dent in the pace of economic growth, at least in the short term, Oliver says. That's on top of the continuing investor nervousness about the high debt of some European governments and the political upheaval in north Africa and the Middle East.
Then there was the earthquake and tsunami and ongoing nuclear emergency in Japan. But Japan's likely need for more of our coal and liquefied natural gas should boost domestic economic growth over the longer term, Oliver says.
It's the already-weak backdrop to domestic economic activity that will give the Reserve Bank the most cause to pause before lifting interest rates. The last rate rise - in November last year, when the banks chose to top up their mortgage rates by more than the rise in the cash rate - is still flowing through the economy. Key economic indicators, such as consumer spending and house financing, remain weak.
The head of investment markets research at Perpetual, Matthew Sherwood, expects economic growth to pick up pace in the second half of the year in the wake of reconstruction in Queensland, continuation of the mining boom and the improving world economy, particularly in the US.
The Reserve Bank will continue to lift rates as it will want to contain inflation and pre-empt any potential overheating of the Australian economy next year, he says.
Sherwood is expecting the next rate rise to come in August, followed by another by the end of the year to take the cash rate to 5.25 per cent.
Oliver says fixing for three years may be too long a time frame as rates could be coming down well before the end of the three-year term.
''But you can see the logic of one or two years because those fixed rates are below the variable rate by a decent margin and you can lock in for the period in which the Reserve Bank may be still raising rates,'' he says.
Willink recommends that, as a first step, consumers contact their existing lender and ask for a better deal. He says consumers should be careful about the ''honeymoon'' rates that are offered by lenders as sometimes mortgages revert to high interest rates after the end of that period.
There are also traps with fixed-rate mortgages.
If interest rates have fallen since the fixed-rate mortgage took effect, borrowers who break their loan within the fixed period have to compensate their lender for the ''economic cost'' of ending the contract.
The break cost is the difference between the interest the borrower would have paid the lender and what the lender will earn on the money when it lends to another borrower at a lower interest rate.
In 2008, many borrowers who were on fixed rates of 9 per cent sought to break their contract when the Reserve Bank cut interest rates to protect the Australian economy from the global financial crisis. They faced break costs of tens of thousands of dollars.
Mortgage Deals
Most people who contact one of the big lenders looking for a discount on the standard variable rate will likely be offered a ''professional'' package, a financial analyst at Canstar Cannex, Mitchell Watson, says.
Borrowers with mortgages of more than $250,000 can expect a discount of up to 0.7 of a percentage point off the standard variable rate and up to half a percentage point for those with mortgages under $250,000, he says.
Generally, there is no longer any minimum income requirements to qualify for professional packages, which include other discounts, such as savings on home and contents and car insurance. They do, however, have annual fees of up to $400 but Watson says the interest-rate savings could more than cover the fee.
Another type of mortgage, the ''basic'' mortgage, was originally a ''no frills'' loan. But as competition heated up, many started to add additional features such as mortgage offset accounts, the flexibility to make extra repayments, the ability to redraw excess amounts from the loan and the ability to split the loan between variable and fixed rates.
Mortgage offset accounts can be valuable. They are linked to the mortgage and the money in the offset account reduces the mortgage balance on which interest is calculated. By having their pay go straight into the offset account, borrowers can save significant amounts of interest.
Competition has also benefited fixed-rate mortgages, making them more flexible than they used to be.
Many fixed-interest home loans allow borrowers to make additional repayments. However, there is usually a limit or cap on how much can be repaid. Some fixed-interest mortgages allow redraw and a few have offset accounts, Watson says.
Sources: http://www.smh.com.au
