Save Now, Fix Later

FinanceNick Gardner630 Words20 July 2009Daily Telegraph1 -
State31EnglishCopyright 2009 News Ltd. All Rights Reserved


MORTGAGE borrowers are being urged to stick with variable loans, despite warnings that interest rates could start rising early next year.
Experts say fixed rates have become so expensive they make little sense for all but the most conservative borrowers.
Three-year fixes now cost about 1.5 percentage points more than the average variable rate a margin equivalent to six, quarter-point rate rises.
Aussie Home Loans executive chairman John Symond says it does not make sense to lock into such a high rate today, ``given it will take six rate increases before a variable rate loan would be more expensive''.
``You are better off taking the savings today,'' he says.
Money markets where banks raise funds for lending are pricing in rate increases starting in early 2010, with the cash rate tipped to hit 3.4per cent in 12 months, 0.4percentage points up from today.
But, given that the rate on most variable mortgages is only about 5.5 per cent once you factor in the 0.7 percentage point discount on most loans there is plenty of room to absorb a few rate hikes and still be ahead.
Every economist Your Money contacted thinks the money markets have it wrong, and that rates will stay flat or fall in the next year.
AMP Capital Investors chief economist Shane Oliver says Australia's economy will contract in the June and September quarters, putting it in a technical recession. ``With unemployment still rising and inflation so low, the RBA will find it very difficult not to cut rates when that news comes through,'' he says.
Oliver predicts the cash rate will fall 0.75 percentage points to just 2.25 per cent by the end of this year, to be back near 3per cent in 12 months.
Macquarie interest rate strategist Rory Robertson is less bearish, but does not foresee interest rate rises in the next year.
``The recent economic data has been so good that there is no evidence households need helping right now,'' he says.
National Australia Bank chief economist Alan Oster says it's ``about 50-50 whether rates will stay flat or fall within the next few months''.
Economists and mortgage brokers say if borrowers are too stretched to afford future rate rises or can't sleep because of the uncertainty, fixing part of the loan is a good idea. But they say it is important to have some of the loan on a variable rate to maintain flexibility.
Commsec chief equities economist Craig James says rates may rise next year, ``but it will be a slow journey upwards and probably will only rise by 2per cent from today's
levels by 2012''.
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THE EXPERTS FORECAST...
THE RESERVE BANK'S NEXT MOVE
* Craig James: Cash rate flat for next year and hitting 4 per cent in 2011.
* Shane Oliver: Rate to drop to 2.25 per cent by end of this year and be back to 3 per cent in a year's time, rising very slowly from then on.
* Rory Robertson: Flat for next year, and it won't rise until unemployment starts falling, likely to be in 2011.
* Alan Oster: 50/50 on whether rates will be the same or lower by the end of the year.