Anxious borrowers beware: time to lock in a rate i

From: Jas


From today's SMH

Anxious borrowers beware: time to lock in a rate is long gone
By John Garnaut
June 20 2002





Those considering locking in a fixed rate for their home loan should think twice.

The big banks have more than doubled their margins on fixed home loan rates in recent weeks, taking advantage of anxious borrowers who seek to insure themselves against rising variable rates.

Falling for today's advertised fixed rates may only ensure the banks improve their bottom line.

The perception of rising rates has allowed banks to raise rates and attract borrowers at the same time, while the banks' actual lending costs have unexpectedly fallen.

"If you're trying to take the gamble on coming out ahead with fixed rates as opposed to variable, then the best time to fix is long gone," a spokesman from Infochoice said.


Commonwealth Bank lifted its three-year rate from 6.59 to 6.89 per cent three weeks ago, and since then National Australia Bank has lifted its effective three-year fixed rate by half a per cent to 6.89.

But in the three weeks since the CBA lifted its rates by 0.3 per cent, the banks' underlying borrowing costs in providing the loans fell by around 0.3 per cent.

The fall flows from unusual activity in international financial markets. The costs of borrowing on the bond market - where banks "hedge" the loans they provide to home owners - has plunged because of uncertainty in the United States.

ANZ's mortgage analyst, David Munro, said ANZ fixes its home loan rates at a margin above the relevant bond market rate. Recently the Australian market seemed to be 0.8 per cent to 1.1 per cent above bond market rates.

Mr Munro said the size of the margin is determined by the level of competition as well as the bank's own costs.

Bank sources revealed that a true "competitive margin" for fixed rate loans was more like 0.5 per cent.

For fixed loans over one to five years, the margins between banks' rates and the underlying costs of borrowing have ballooned to about one percentage point, or double the "competitive" level.

Margins on the less common 10-year fixed rate loans have blown out to about four times the competitive level, providing the banks with a neat 1.9 per cent layer of winter fat.


The recent trend is in contrast to patterns over the last few years, which show that margins on fixed rate loans have on average been more competitive than margins on variable rate loans, though the terms of variable rate loans tend be far less restrictive than fixed rate loans.

If a reversal in the bond markets fails to squeeze the current wide margin in the next few weeks, competition probably will.


---------------------
Profit taking above and beyond the call of duty? The banks? Never!
Jas
----------------------------------
When facing a difficult task, act as though it's impossible to fail. If you're going after moby dick, take the tartar sauce
 
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Reply: 1
From: Gail H


Hi Jacinta,

I understand all that, but if an investor fixes rates as a form of insurance, then the fact that the banks do well out of it shouldn't be enough to deter you from this strategy, should it?

Hell, 6.89 still sounds like cheap money to me! Personally, I wouldn't hesitate to lock it in for a few years.

Just my approach though.

Gail
 
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Reply: 2
From: Tim Willis


My thoughts are that the bank's decision makers probably have a pretty good
idea of where things are headed and would not be offering a fixed rate that
they think they will loose on. I feel they are preying on public
nervousness in order to increase their bottom line. WOuld anyone here offer
a rate that they think they will loose on.

But yes it does offer some piece of mind and provide a constant for a while,
but what about the jump at the end of the term.

Tim.

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From: propertyforum Listmanager
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Subject: Anxious borrowers beware: time to lock in a rate i


From: "Jacinta Thomler" <jacinta98@hotmail.com>

From today's SMH

Anxious borrowers beware: time to lock in a rate is long gone
By John Garnaut
June 20 2002





Those considering locking in a fixed rate for their home loan should think
twice.

The big banks have more than doubled their margins on fixed home loan rates
in recent weeks, taking advantage of anxious borrowers who seek to insure
themselves against rising variable rates.

Falling for today's advertised fixed rates may only ensure the banks improve
their bottom line.

The perception of rising rates has allowed banks to raise rates and attract
borrowers at the same time, while the banks' actual lending costs have
unexpectedly fallen.

"If you're trying to take the gamble on coming out ahead with fixed rates as
opposed to variable, then the best time to fix is long gone," a spokesman
from Infochoice said.


Commonwealth Bank lifted its three-year rate from 6.59 to 6.89 per cent
three weeks ago, and since then National Australia Bank has lifted its
effective three-year fixed rate by half a per cent to 6.89.

But in the three weeks since the CBA lifted its rates by 0.3 per cent, the
banks' underlying borrowing costs in providing the loans fell by around 0.3
per cent.

The fall flows from unusual activity in international financial markets. The
costs of borrowing on the bond market - where banks "hedge" the loans they
provide to home owners - has plunged because of uncertainty in the United
States.

ANZ's mortgage analyst, David Munro, said ANZ fixes its home loan rates at a
margin above the relevant bond market rate. Recently the Australian market
seemed to be 0.8 per cent to 1.1 per cent above bond market rates.

Mr Munro said the size of the margin is determined by the level of
competition as well as the bank's own costs.

Bank sources revealed that a true "competitive margin" for fixed rate loans
was more like 0.5 per cent.

For fixed loans over one to five years, the margins between banks' rates and
the underlying costs of borrowing have ballooned to about one percentage
point, or double the "competitive" level.

Margins on the less common 10-year fixed rate loans have blown out to about
four times the competitive level, providing the banks with a neat 1.9 per
cent layer of winter fat.


The recent trend is in contrast to patterns over the last few years, which
show that margins on fixed rate loans have on average been more competitive
than margins on variable rate loans, though the terms of variable rate loans
tend be far less restrictive than fixed rate loans.

If a reversal in the bond markets fails to squeeze the current wide margin
in the next few weeks, competition probably will.


----------------------------------
When facing a difficult task, act as though it's impossible to fail. If
you're going after moby dick, take the tartar sauce


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Reply: 2.1
From: Tibor Bode


Another example of the lemming world. Fear and Greed. Now the fear is palyed on. Fix or you'll miss out and interest rates will rise to 10%!!! Where my money is? All my recently purchased properties are variable rate, the earlier ones fixed at 6% for 2 years. I just would not jump on the band wagon. If rates will go up by another 1.5% to 2%, then they will also come down from there when the Reserve realised that it overshot again (as usual). Just my 2c.

Tibor
 
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Reply: 1.1
From: Jas


> From: "Gail H" <gailhubble@telstra.com>
Hey Gail,

> I understand all that, but if an investor fixes rates as a form of
> insurance, then the fact that the banks do well out of it shouldn't be
> enough to deter you from this strategy, should it?

If you don't want to refinance anytime soon, I'd say why not get the
insurance?


> Hell, 6.89 still sounds like cheap money to me! Personally, I wouldn't
> hesitate to lock it in for a few years.

Frankly, the economists are saying that the reserve bank wants to go to
a 'neutral cash position'. They reckon this means an official rate of
around 6%. This'd mean that the bank's rate would hit round 8%.
Question is, how often are the economists right?

On a personal level, I have locked in some of my portfolio, whilst
others that I want to play with I kept variable.

Jas
 
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Reply: 2.2
From: Jas


> From: Tim Willis <Tim@MIPower.com.au>

Hey Tim,

> My thoughts are that the bank's decision makers probably have a pretty
> good
> idea of where things are headed and would not be offering a fixed rate
> that
> they think they will loose on. I feel they are preying on public
> nervousness in order to increase their bottom line. WOuld anyone here
> offer
> a rate that they think they will loose on.
>

The banks don't have to predict that far into the future. When you come
to them for funds, they borrow the money from the wholesale market at a
lower rate, and then onlend to you at higher rates (does this sound
familiar wrappers?).
Only smaller credit unions and the like use depositor funds for lending.
Everyone else uses the money market.

The banks always put in their margin, so whether interest rates go up,
down or sideways, the banks are fine.

> But yes it does offer some piece of mind and provide a constant for a
> while,
> but what about the jump at the end of the term.

The idea is hopefully rents have risen by then to cover the jump. I
agree thou, the jump to 18% was a high one for people coming off fixed
rates in the late 80s.

Jas
 
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