Borrowers benefit from falling fixed rates

Sixteen lenders have dropped the interest rates on their three-year fixed-rate home loans this week as demand for housing loans continues to sag.

The lenders cut by an average of 13 basis points taking the average three-year fixed rate to 6.01 per cent, according to financial comparison site Rate City. Suncorp chopped the most, lowering the rate by 31 basis points to 5.72 per cent.

Analysts said that sinking global interest rates – triggered by continuing worries about the outlook for the world’s economy – have lowered the costs Australian banks pay for fixed-rate loans.

“Fixed home loan rates are usually a good indicator of the direction interest rates will move because lenders set their fixed rates based on their projected estimate of rate movements,” said RateCity spokeswoman Michelle Hutchison.

“What this means is if fixed rates are dropping, then it’s likely that lenders expect variable rates to fall further.”

The impact of the European debt crisis has forced central banks and governments to scale back expectations for growth, ensuring official rates remain low in the US, Europe and Japan. At the same time China has showed signs of slowing and the US recovery appears fragile.

This has forced commercial banks to lower rates to induce more borrowing.

ANZ Bank has cut its three-year fixed interest rate home loan by 20 basis points to 5.94 per cent, RateCity said. Westpac-owned Bank of Melbourne chopped its by 20 basis points to 5.74 per cent. Commonwealth Bank has lowered its three-year fixed rate by 20 basis points to 5.94 per cent.

RBS Equities banking analyst John Buonaccorsi said fixed-rates loans typically followed the so-called “swap rate” that the banks pay for short-term wholesale funding.

“We’ve seen the collapse of rates on the 10-year Commonwealth bond rates and the swap rates for the commercial borrowers have also fallen.”

Mr Buonaccorsi said falling fixed-interest rates were likely a reaction to falls in the base rate banks paid to borrow money.

Ms Hutchinson said the drop in fixed-rate loans shows “that lenders are competing harder to attract new home loan customers and by lowering their fixed rates (and) they are hoping to lock in customers to avoid losing them to refinancing with another lender – at least for the fixed period”.

Earlier this month, data from the Australian Bureau of Statistics showed May home loans unexpectedly dropped by 1.2 per cent despite the official interest rate cuts by the Reserve Bank intended to spur borrowing.

A Credit Suisse index shows the market tipping a 42 per cent chance of a rate cut from the Reserve Bank in August. The official cash rate stands at 3.5 per cent where the RBA left it in June. In the year ahead, investors foresee the cash rate hitting 2.5 per cent. Economists also tip further rate cuts to come.

Source: domain.com.au 20 July 2012