Fixed Loan Cheaper Than Standard

Sun Herald

Sunday January 18, 2004

By DAVID POTTS, BUSINESS EDITOR

A RARE chance to fix your mortgage below the standard variable rate is likely next week when the consumer price index is expected to rise by an annual rate below 2 per cent.

So much for a runaway economy. The stronger dollar is contractionary and will remain so since there's no prospect of the US dollar pulling itself off the floor and dragging our dollar down until interest rates in the US rise, which the Federal Reserve Board has gone to great lengths to rule out in the foreseeable future.

The damage to the economy from the Aussie dollar is one thing. But the rise in real interest rates the cost taking inflation into account is another matter altogether. It was rising real rates that produced the Depression, but let's not dwell on that.

With inflation likely to be below 2 per cent for at least six months, a rate increase would mean the Reserve Bank of Australia was deliberately tightening, a shift out of what governor Ian Macfarlane calls neutral.

The combination of a strong dollar and rising real rates will make it think twice about lifting rates for the time being.

That's a relief to borrowers, and there's even better news. While you've been soaking up the summer sun, home lenders have been quietly dropping their fixed rates.

The cheapest five-year mortgage, from St George, is 6.95 per cent which is a smidgin below the standard variable rate of 7.07 per cent. Refinancing for such a small saving wouldn't be worth the trouble after discharge and application fees are taken into account. But things will get better.

New borrowers can do better too.

Shorter terms are well below the bank variable rate, starting at 6.19 per cent from Newcastle Permanent for one year. For three years the lowest rate is 6.89 per cent from the Bank of Queensland, which is expanding south.

No need to rush as these may well drop next week.

Comparison rates, which take into account fees, show RESI is the cheapest fixed-rate lender across the board, from 6.49 per cent to 6.88 per cent. But this shows a quirk in the comparison rate since RESI's headline rates aren't low, ranging from 6.95 per cent for one year to 7.19 per cent for five years.

So how can the comparison rate suddenly lower them?

Because the calculation covers seven years, and so assumes you'll revert to the then variable rate the lender is offering. In this case RESI's variable rate is a low 6.45 per cent (which incidentally produces a 6.47 per cent comparison rate because there are no monthly fees).

Not that there's any guarantee what the variable rate will be next month let alone in seven years, although research group Cannex says RESI is consistently one of the lowest.

Savers are the winners from higher real rates. In this climate of falling inflation, bank accounts paying about 6 per cent are better than they look, and carry no downside risk because your capital is safe.

Mixing terms is better so you keep your options open for higher interest rates later in the year and aren't disadvantaged if, against expectations, they dropped.

BEST HOME LOAN RATES
 Variable               6.15%   HomePath                1300 130 852
 Basic          5.89%   Wizard                  131 970
 Honeymoon      4.89%   AMO                     1300 131 177
 1 year fixed   6.19%   Newcastle Permanent     131 987
 2 year fixed   6.75%   Newcastle Permanent     131 987
 3 year fixed   6.89%   Bank of Queensland      1300 557 272
 4 year fixed   7.09%   Bank of Queensland      1300 557 272
 5 year fixed   6.95%   St George               133 555
 Source: CANNEX

© 2004 Sun Herald

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