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Home buyers are flocking back to variable rate mortgages which now account for 91% of the residential lending market, their highest proportion in four months.
Mortgage broker Mortgage Choice reported in April, basic variable mortgages accounted for 48.15 per cent of all home loans approved - up nearly one per cent from March, while standard variable mortgages comprised 42.77 per cent of the market, down 1.47 per cent from March.
Basic variable loans generally have fewer loan features than a standard variable loan.
Fixed rate loans accounted for four per cent of all approvals up a percentage point from a month earlier.
Basic variable loans have been the most popular loan type for four months after overtaking standard variable for the first time in January 2009!
Rates charged on variable home loans move in line with interest rates as set by the Reserve Bank of Australia (which has successively cut its overnight cash rate since September last year to a 49-year low.
And despite interest rates being at their lowest in decades, the sensitive global and domestic economic climate is having a strong influence over loan product preferences.
Consumer conservatism with rates and fees continues to win out against loan flexibility and extra features.
Line of credit loans in April, popular with property investors, posted a fall of five per cent from the previous month.
Commitments for owner-occupied housing rose 4.9 per cent in March, seasonally adjusted, to 59,793, Australian Bureau of Statistics data showed this month.
Total housing finance by value rose by 6.7 per cent in March, seasonally adjusted, to $20.688 billion, the latest month in which data was available.
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Another interesting artcile from Bankwest over at realestate.com.au (Full article here: http://www.realestate.com.au/doc/review/feb09-1/bankwest.htm?rsf=newsletter_rea), below is an extract:
Almost every industry expert has a different view. Some senior economists are forecasting further large falls in the RBA cash rate whilst others say we’re nearing the bottom of the cycle. To the ordinary borrower, it can all be very confusing.
Of course, the reasons for choosing a fixed rate mortgage as opposed to a variable product may differ based on individual circumstances.
For first homeowners who are on a tight budget, a fixed rate mortgage is a great way to lock in a rate and know exactly what the payments will be for a few years while they are settling into their home. Fixed rates may be slightly higher than a variable option, but if knowing the rate is locked in helps borrowers sleep at night, it can be a great option.
On the other hand, a mortgage product with a variable rate may provide greater flexibility for homeowners looking at selling their property or who are looking to pay off their mortgage faster with extra repayments.
So what are the main things to be aware of?
A fixed rate loan may be costly to leave early
The majority of fixed rate loans will charge a break cost that is based upon the economic cost to the lender of reversing the funding they have locked away for the life of the loan. So if you anticipate paying out the loan early, a variable rate option may be more appropriate.
Do you want to pay off more than the required repayments?
Most fixed rate loans limit any additional repayments to a specific amount each year (eg. $5,000) and if you put more into the account, the lender could pass on any costs.
Read the fine print
Variable rate loans can offer more flexibility when paying the loan back early, but this could incur high exit fees with many ‘introductory’ rate loans. It’s important to understand the terms and conditions of the product that you’re applying for.
Ultimately, you should work out what’s more important to you; the knowledge of exactly what your repayments are with a fixed rate, or the flexibility to repay the loan early that comes with a variable rate.
If you want the best of both worlds, most lenders will allow you to ‘split’ your loan.
For example, you could have $200,000 as a variable rate loan and $200,000 on a fixed rate loan. This can be a great option as you are protected against rate movements on one side, yet you retain the ability to put extra funds (such as a tax refund) into the variable portion. It also means you’ll be charged a lower break cost on the fixed portion if you need to pay out the loan within the fixed rate term.
Looking ahead, it seems that we may be in for several more rate cuts as variable and fixed rates continue to fall. But how far is anyone’s guess. If you’re comfortable that you can afford the repayments on your mortgage, the question of whether to fix or not comes down to what is most suitable to your individual circumstances. That means weighing up your plans for the next few years against any savings you might pick up from renegotiating your loans.