April 2009 Survey: Home loan rates: Where are they going?

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 rate cuts by major banks and the RBA, the average standard variable rate was calculated at 5.82% in May 2009. These forecasts do not reflect the interest rate for banks and other lending institutions. Forecasts may have changed since the survey was completed on April 8, 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.

Keep an eye out for the May budget. If the First Home Owner Grant increases are not extended, the RBA may need to adjust cash rates in a manner that isn’t necessary. Many consumers are unaware that variable rates can move in a different way from fixed rates. This could mean that they might miss the best chance to fix.

The RBA anticipates that the cash rate will continue to be lowered this fiscal year to new record lows. However, fixed rates have begun to rise. If you can secure a fixed rate of 4.0% to 5.0% for three to five year periods, and the terms, conditions and features are suitable for you, it is worth looking at.

If you want certainty about your future repayments, this is the best option. A combination of part variable/part fixed gives flexibility should rates drop further than anticipated”
John Kolenda, the executive director of Loan Market Group, is John Kolenda

What is the average standard variable interest rate at the end of July 2009? Are borrowers advised or not to fix their variable rates?

“I recommend borrowers stay variable until rates get to 4.82% then split. Borrowers shouldn’t fix below the bottom of any cycle. Expect more rate cuts. 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. There are three reasons for this. Firstly, we’re still unsure where this global financial crisis is heading. The second is that interest rates are expected to continue falling over the next few months. The third reason is that I believe the cost to fund Australian banks should drop once there’s confidence in the financial and banking industries. This will mean that the average variable rates of banks will more closely resemble the RBA cash rate”
Peter Koulizos, the Coordinator for 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. To stimulate the economy, there is still time for the overnight cash rate to be adjusted (down). I recommend basic variable-rate loans. This means that the loan amount is divided into two parts depending upon the applicant’s needs. The variable rate is lower then the current fixed rate and allows you to take advantage of any rate drops. Variable rates can be converted to fixed-rate loans later in the calendar year if they rise. The remaining variable component will still be eligible to make voluntary payment. Lenders may offer a hot fixed rate for two or three years (i.e. If a lender offers a hot fixed rate of two- or three years (i.e. You should take advantage of any lender that offers a hot two- or three year fixed rate (i.e. As always, think through your financial plans for that term, and if in doubt, speak with your mortgage adviser”
Martin Castilla, a personal advisor on Smartline’s mortgages, is Martin Castilla.

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

“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 is the chief economist at 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. As fixed rates fall to their 45-year lows rate inquiries are on the rise. Consumers want to avoid another high interest rate cycle. Resolving your loan is a smart move. You should ensure that you are comfortable with the terms and conditions of the new contract. 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 is Resi’s head for marketing, consumer advocacy, and marketing.

“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”
Access Loans P/L’s managing director is Darryl Simms

“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, chief economist, AMP Capital Investors, head of investment strategy

“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 make your loan repayments, consider fixing different portions of the loan to act as a sliding hedge. For example, you could fix 25% of the loan for 15 year, 25% 10 year, 25% 5 years, 25% 5 years, 25% 5 years, 25% for 5 years, and 25% for 5 years. You can take other positions depending upon the economy. There are several options to hedge your rates. You can use the following percentages: 15% fixed up to 15 years, 25% for 10 years, 35% fixed up to 5 years, 35% fixed up until 5 years, and 35% fixed up for 5 years. These percentages are also available if interest rate rises over time: 45% fixed to 15 year, 35% fixed at 10 years, 25% fixed at 5 years, 25% fixed at 5 years, 25% fixed up to 15 year, and 25% fixed up until 15 years.

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, Inspired Finance Group