Lock in and save

Competition among mortgage lenders is strongest in fixed-rate home loans rather than variable-rate loans. Some lenders have cut their three-year fixed rate – the most popular term – since last month’s Reserve Bank meeting, when the bank left the cash rate unchanged.

The three-year fixed rates are still at very low levels – perhaps the lowest they have been for the past three years relative to variable rates, says the chief executive of RateCity, Damian Smith.

Home buyers on variable-rate mortgages could face ”creeping” increases in the next few months, regardless of what the RBA does with the cash rate, as lenders claw back what they say are higher funding costs.

”Lenders may well put up rates in small increments, at least up to the point where they lose more customers than they raise in additional revenue,” Smith says.

The best three-year fixed rates are a little less than 6 per cent, compared with the variable rate that most people pay of about 6.8 per cent.

”Three-year fixed rates remain highly competitive against variable rates and offer borrowers certainty of rates and repayment levels,” Smith says.

One of the reasons lenders are competing more keenly on fixed rates is their ability to hold on to customers. The ban on exit fees on variable mortgages taken out from July 1 last year makes fixed-rate loans more ”sticky” because of their break costs.

Anyone tempted by a fixed-rate mortgage should first ask the lender if the fixed rate is guaranteed or whether it could change before the date of settlement, Smith says.

Some lenders offer to guarantee the interest rate on their fixed-rate mortgages for up to 90 days if the borrower pays a ”lock-in” fee. These fees are either fixed or a percentage of the loan balance and can cost up to $750 on a $300,000 mortgage, he says.

But borrowers should take into account the fact that fixed-rate mortgages are not as flexible. Most allow extra payments up to a point but will not allow a significant lump sum to be deposited, Smith says.

And, of course, there is the risk that variable mortgage rates could fall, making them more attractive.

Smith says that with a 50-50 split between a fixed-rate and variable-rate mortgage, the borrower can be only half wrong.

He says borrowers in variable-rate loans should keep an eye on the interest rate they are paying. Lenders might decide creeping increments are a more effective way to increase revenue to avoid a public backlash instead of large one-off increases.

At the end of last year, ANZ said it would review its variable rates on the second Friday of each month, breaking the link with the RBA, which meets on the first Tuesday of every month, except in January, when it doesn’t meet.

This change severs the link between changes in movements in the official cash rate and variable rates and makes it harder for consumers to keep up.

A rise of 0.1 percentage points might not seem like a significant impost for borrowers but if, as Smith expects, lenders raise their rates by small amounts, the cumulative effect could be significant for borrowers.