Fixed rate home loans lose favor

Fixed rate home loans lose favor

Fixed rate home loans lose favor

Lenders' variable rate discounts offering a strong incentive

Heated competition in the home loan market, a wider range of variable loan special offers and extended cash rate stability look to be suppressing borrowers' appetite for fixed rate loans.

Demand for such loans has taken a tumble as a greater proportion of new borrowers move to take up variable rate deals, experiencing a fall for the first time since July 2010.

The latest data from Mortgage Choice shows 10.7% of the home loans approved for its customers in February had a fixed interest rate. This compared to 15.3% in January, 15.2% in December and 11.2% in November.

The consumption of fixed rate loans fell for the first time in four months in the majority of states by an average of 6 percentage points, except WA, where demand grew by 1.2 percentage points.

The appetite for fixed interest rates is at its lowest since October 2010, just before it rose due to November's surprise rate increases. Last month's fall in demand coincides with the start of the lender war' for home loan volume growth. It appears more new borrowers are lapping up the deals on offer, taking advantage of lenders' various incentives as they compete to outstrip each other of vital market share.

A move away from fixed interest rates may also signal an uptick in positive consumer sentiment towards the economic outlook. The next cash rate rise is now tipped for mid to late this year.

Ongoing discount loans - where the interest rate is discounted over the entire loan term usually in return for an annual fee - experienced a 2.1 percentage point drop in popularity. This probably occurred as borrowers, smitten by the range of special offers, increased their demand for standard and basic variable rate loans, by 3.9 and 1.9 percentage points respectively.

In February, standard variable rate home loans continued to be the loan of choice, at 34.6% of Mortgage Choice's news approvals. Basic variable loans followed at 25.6%, before ongoing discount loans at 23.3%, which took a step back from second spot in January.

Demand for line of credit home loans (often popular with investors) rose marginally to 5.1% of approvals from 4.8% the month prior while introductory rate home loans accounted for only 0.9%, though this was up from 0.2%.

Note: Mortgage Choice currently writes one in 25 new home loans in Australia, equating to over $10 billion in approvals per year, hence it provides a clear insight into borrower preferences. The 18+ year old mortgage broker companyhas a loan book of over $40 billion.

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