Picking the wrong time to fix

Tuesday the 18th of August, 2009 No Comments »

Posted by Iden Money .

A review of the fixed rate loan data in the Infochoice database shows  a couple of interesting trends. Once again borrowers have picked the wrong time to fix. Average three and five year fixed rates bottomed in March and have risen quite sharply since then.Three and five year bond and swap rates moved up in recent months, as investors in the financial markets factored in economic recovery and the possibility of a pick-up in inflation. Fixed rate mortgage pricing has responded to this movement.

The gap between variable rates, which are below six per cent, and fixed rates (five year rates are up around 7.5 per cent) is the widest the market has seen since 2002.

The average three year fixed rate of the big four banks peaked at 9.42 per cent in July last year. It then reached a low of 5.66 per cent in March and is currently 6.74 per cent.

The average five year fixed rate of the big four peaked at 9.39 per cent in July last year. Its low was 6.45 per cent in March and the current average is 7.45 per cent.

The average standard variable rate for the big four is 5.78. Borrowers will have to figure out whether that gap will narrow as a result of fixed rates coming back down or variable rates starting to rise again.

One economist with a view on this question is AMP Capital Investors chief economist Shane Oliver, who says long bond yields were low earlier this year, reflecting the general gloom about the economy, but have picked up in the past couple of months. In the space of about six months the 10 year Commonwealth bond yield moved from four to six per cent.

Oliver says: “We have gone from thinking about an endless recession to focusing on green shoots and recovery, and what we are seeing in bond markets now is an expectation that may be some renewal of inflationary pressure as the economy recovers.”

Oliver expects long rates to moderate in the period ahead.