Variable and fixed gap closing

The gap between variable and fixed rate mortgages is closing and borrowers, usually reluctant to pay a premium for interest rate certainty, are starting to move into fixed rates.

The latest mortgage market data from broker Mortgage Choice, released yesterday, shows a sharp increase in the number of borrowers opting for fixed rates in May. Fixed rate loans made up 3.26 per cent of the broker's loan approvals in the month, compared to 1.77 per cent in May.

Australian Bureau of Statistics housing finance data, also out yesterday, shows a similar trend. According to the ABS, fixed rate loans dropped from a peak of eight per cent of all dwellings financed in June last year to a low of 2.1 per cent in February and March. There was a pickup to 2.4 per cent in April.

The other mortgage market survey published yesterday, aggregator Australian Finance Group's mortgage index, shows a slightly varying trend. Of the 6624 mortgages sold by AFG brokers in May, 2.9 per cent were fixed rate loans, down from 3.2 per cent in April.

AFG's data agrees with the ABS that demand for fixed rate loans peaked in June last year (at 8.3 per cent in this case). It puts the bottom at two per cent in December and there has been a rising but uneven trend since then.

Mortgage Choice says the average variable rate among lenders on its panel is 7.05 per cent, while the average three-year fixed rate is 7.77 per cent.

The cost difference on a $300,000 loan is $137 a month. More home buyers are coming to the view that that is a reasonable insurance premium to hedge against more rate increases.

Infochoice data shows that last week 11 lenders cut their fixed rates. St George cut its two-year rate by 40 basis points (to 7.14 per cent), Westpac cut its three-year rate by 40 points (to 7.39 per cent) and BankWest cut its three-year rate by 15 points (to 7.64 per cent).

Among other trends to emerge from the data, first home buyers continue their retreat. According to AFG, first home buyer share dropped from 10.2 per cent in April to 9.9 per cent in May.

The ABS shows a slight pickup in first home buyer activity. They made up 16.3 per cent of all dwellings financed in April, compared to 15.9 per cent in March. But the overall trend is one of decline from the peak of 28.5 per cent in May last year.

According to the ABS, the overall number of dwelling commitments fell 1.8 per cent in seasonally adjusted terms and 2.8 per cent in trend terms. The market has been in decline since June last year.

The value of dwelling commitments rose 0.8 per cent in seasonally adjusted terms but fell 0.8 per cent in trend terms. Lenders are writing around $21 billion of home loans a month, compared to $23.6 billion a month last June.

The only positive trend in the ABS figures is lending to investors, which picked up 1.3 per cent in April (in seasonally adjusted terms) and has been on a strong upward trend since January.

AFG's figures also show that property investors are more active. Investors made up 36.7 per cent of loans written by AFG brokers in May, compared to 33.7 per cent in January and a low of 27 per cent last August.