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Fixed-rate mortgages gather momentum as official rates set to stay on hold

Canberra Times logo Canberra Times 25/05/2014 Clancy Yeates

Fixed mortgage rates look set to stay at historic lows for at least the next few months, as banks try to pinch each other's customers and investors bet the Reserve Bank will leave official rates on hold for longer.

While advertised variable mortgage rates have not moved since last August, home owners have been able to cut their monthly repayments by using fixed rates, which have been drifting down thanks to competition between lenders and changes in global markets.

Now experts are tipping fixed rates could stay low for several more months, amid predictions that the central bank will leave official rates at a record low of 2.5 per cent for another year.

In mid-April investors were tipping an 80 per cent chance of an official rate rise in a year's time, but on Friday this was about 25 per cent.

The change in expectations has caused fixed rates - which reflect the outlook for official rates - to continue falling.

Figures from RateCity show three and four-year fixed rates in particular have edged lower in the past month, while HSBC last week cut two-year fixed rates to 4.58 per cent.

ING Direct treasurer Michael Witts said he thought fixed mortgage rates were unlikely to rise in the short term, because markets had recently scaled back the chances of an interest rate hike from the RBA.

If investors continued to bet the RBA would stay on hold well into 2015, this would keep fixed rates at low levels.

''The reality is fixed rates if they are not at 30 or 40-year lows they are close to it,'' Mr Witts said. ''I think fixed rates will be at these levels for a while.''

ING Direct is writing 45 per cent of all new home loans as fixed-rate products - a much higher percentage than the industry average of about 15 per cent.

Despite the fall, banks say there has only been a modest increase in sales of fixed-rate loans.

The National Australia Bank's general manager of consumer lending products, Melissa Reynolds, said there had been a 5 per cent increase in sales of fixed-loan products and many customers were using low rates to pay down their mortgage more quickly.

''The predominant preference is still for a variable rate loan, so we haven't seen a lot of movement,'' she said.

Deutsche Bank interest rate strategist David Plank said a range of negative economic developments had prompted markets to predict the RBA would stay on hold for longer.

The price of Australia's biggest export, iron ore, has slumped to a near two-year low. There are also fears the budget will wound the economy through its negative effect on household and business confidence.

''The market here has basically given up on pricing rate hikes for the next couple of years,'' Mr Plank said. ''Based on what we know at the moment, it looks like fixed rates will be steady for a few months.''

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