Proportion of New Fixed Rate Loans

[keithj]

The recent ABS Housing Finance Commitments shows the proportion of fixed rate loans taken out for new mortgages and refinances for the last year. From Table 9 on p17.

In March 08 ~24% of new loans were fixed rate, in March 09 only 2.4% were fixed.

Why do such a large proportion of people fix when fixed rates are above the long term SVR average, but such a small proportion fix when they are below the long term SVR ?

Is it because the fixed rate on the day was lower than the SVR a year ago & vice versa now ?

 

[steveadl]

I guess there's plenty of different reasons for people to make a decision either way.

If I had to guess as a generalisation, I would say people taking out loans last year when rates were high panicked in case rates continued to rise and so fixed the rate.

You could also look at that decision as being quite prudent/sensible ie. if they knew higher rates would push them over the edge, so they fixed to be safe. On the other hand, while rates are so low now, people don't feel the pressure to fix as they can absorb a fair few % increase before they're in trouble.

Or am I giving the wider population too much credit, and they just go for whatever rate is cheapest when they take out the loan?

 

[JIT]

Hi there,

Here's an interesting poll done about 18 months ago...just shows how wrong most of us (who voted) were on SS!

http://www.somersoft.com/forums/showthread.php?t=36873

And then another regarding the fixed rate uptick...again shows how wrong most of us (who voted) were on SS!

http://www.somersoft.com/forums/showthread.php?t=48596

Do your own research!

Sorry, not sure if this is relevant to the thread topic.

 

[Token Funder]

Seen a big surge in fixed rate borrowers over the last week. Interesting to see if it is a trend.

 

[joeExpat]

Here's an interesting poll done about 18 months ago...just shows how wrong most of us (who voted) were on SS!

http://www.somersoft.com/forums/showthread.php?t=36873

That is interesting how few predicted the falls.
I wonder if the reverse will happen .. no one seems to think rates will climb any time soon...

 

[Propertunity]

Seen a big surge in fixed rate borrowers over the last week. Interesting to see if it is a trend.

Any way you can tell if the 'fixers' are Investors or FHBs?

 

[keithj]

Or am I giving the wider population too much credit, and they just go for whatever rate is cheapest when they take out the loan?

I reckon you give the wider population to much credit steve . I think most people think short term & then hope they are right.

That is interesting how few predicted the falls.
I wonder if the reverse will happen .. no one seems to think rates will climb any time soon...

Absolutely. We'll see.

People (here) often quote that the bank wins 95% of the time on fixed rate loans. With a 10:1 ratio of people fixing when rates are high compared to now when rates are low, it's not hard to see why.

 

[steveadl]

Did you end up fixing any yourself Keith? I know you were thinking about it. Feel free not to answer if you prefer.

 

[BayView]

The problem with fixed rates for most people is the same problem you see occurring with shares investing.

Most people wait until they see a definite trend in the market, wait a bit longer just in case, think about it a bit more, and then buy - late.

Then they see the market drop, but don't sell in case (or hoping) the market recovers and their shares come back up. Many people simply hold on to these shares forever.

This is why many (mum and dad) share investors often get creamed.

The parallel to the fixed rate scenario; they don't want to fix their rates initially, because the rate is higher than the variable.

So they wait for the trend to be blatantly obvious that the variables are going up (as well as the fixed), wait and see, then think about it a bit more, and decide to fix towards the top of the cycle.

Then the variable rates stop going up as they always do, but these people are now locked in.

It works in reverse when the variables (and the fixed) are low. Not many people want to lock in for a fixed rate, which is higher than the lower variable, which may keep dropping.

So, they miss the opportunity to lock in a low fixed rate.

What many are doing now is refinancing out of their fixed rate, back to a variable which is very low. What they actually should do - if they are a fixed rate mentality person - is refinance back into a lower rate fixed loan. But they don't - they see the really low variable and want to get in on it. And they often do this when the rates are about to go back up after having been low.

The cost of all this musical loans negates any money they will save by changing most likely.

Ironically, this is the best time for these people to be locking - lower fixed rates compared to historical averages.

Plain old human nature and herd mentality.

 

[lizzie]

fwiw - having lived thru the last labor government trying to steer thru a recession, and also being around when the last round of low fixed rates were on offer (around 2002) i recently fixed everything except my offset mortgage ... it a sanf thing.

 

[keithj]

Did you end up fixing any yourself Keith

Yes, I was one of those 2.5% that fixed. I fixed ~75% for 5 yrs at the recent low of 6.19%.

 

[HiEquity]

Back then fixed rates were pretty close to (sometimes less than) SVRs and the trend was up so there seemed to be nothing to lose in going for a fixed rate close to the SVR.

Now fixed rates are a LOT higher than SVRs so most people would be taking the bird in the hand while they can...

 

[Edmond Dantes]

Yes, I was one of those 2.5% that fixed. I fixed ~75% for 5 yrs at the recent low.

at what rate keith if you don't mind sharing?

 

[BayView]

Yes, I was one of those 2.5% that fixed. I fixed ~75% for 5 yrs at the recent low of 6.19%.

Nicely done!

 

[Token Funder]

Any way you can tell if the 'fixers' are Investors or FHBs?

Yes.....not that I have...perhaps I will.