MONEY MAGAZINE - SEPTEMBER 2007 ISSUE - ANDREW WILLINK'S COLUMN
HEADS OR TAILS ON FUTURE RATE RISES
Whether they like it or not, most home loan borrowers have regularly been engaging in a form of the traditional Aussie game, Two-Up. By choosing to use a variable rate mortgage, they are effectively gambling on rates going up (heads) or rates coming down (tails). The Spinner in the game, of course, is the Reserve Bank of Australia (RBA) which has called no less than four rate rises in the last 18 months.
The frequency and uncertainty over interest rate rises is having a curious effect on borrowers. Preference for fixed rate loans is on the increase with more and more people opting to fix rather than take their chances with variable. Over 25% of all residential loans are now fixed, compared to 17% prior to January last year. Many people are now using fixed mortgages to hedge against further rate rises they fear they will not be able to service on a fixed income.
South Australia is leading the charge towards fixed mortgages with 35% of loans in that state being fixed. Factors which may influence this trend are higher unemployment levels than other states and a higher age demographic which is less tolerant to risk.
RateCity has also tracked a sharp rise in the use of fixed rate loans by property investors.
Australia is only one of a few countries which favours variable over fixed. In the United States the volatility of the home loan market has seen the great majority of Americans opting for a fixed rate and security over repayments. Closer to home, New Zealanders show a distinct preference for fixed rate over floating mortgages. Over 85% of residential home loans in New Zealand are fixed. While both countries have experienced an economic roller coaster in the last decade, the US in particular, has lived through borrowing rates as high as 6.5% and as low as 1%.
Ultimately, the decision by home owners to stick with variable interest or to fix part of their loan rests with the mindset of a nation. It is clear, however, that Australian borrowers are beginning to show the level of risk they will cope with, as the trend towards fixed increases.
Andrew Willink, Executive Chairman
www.ratecity.com.au
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