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Mortgage trends: Basic is in, fixed is out, and capped is hot

Mortgage trends Basic is in, fixed is out, and capped is hot

Chris Walker investigates the latest trends in home loans.

December 1, 2009

Despite a recent string of rate hikes, borrowers are shunning fixed rate home loans. The latest Australian Bureau of Statistics (ABS) figures on housing finance show that in September 2009, demand for fixed loans fell by more than 10 percent, with fewer than 6 percent of homebuyers locking into a fixed rate.

It’s not really a surprising result. Many of today’s fixed rates are considerably higher than variable rates, and the majority of borrowers clearly aren’t convinced that market rates will rise quickly enough for fixed rates to offer worthwhile savings.

On the flipside, evidence from broker groups suggests borrowers are showing a marked preference for ‘basic’ home loans. These loans typically offer fewer features than a standard variable loan, but the pay-off can be a much lower rate. For homeowners struggling with higher repayments, it’s likely that loan affordability takes top priority over a wealth of features.

Another hot favourite at present is construction loans. This follows an 8 percent rise in new home approvals in September 2009 alone according to ABS. 

Construction mortgages are a variable loan where the principal is paid in several instalments in line with the home builder’s payment schedule. It’s an option that isn’t offered by all lenders, so it’s worth checking the availability of this feature if you’re considering building a home from scratch or renovating.

The big news in home loans is the arrival of the ‘capped rate’ mortgage. A capped rate loan works just like a variable loan – up to a certain rate limit or cap. It means that irrespective of how market rates move, the interest rate won’t move beyond this upper limit.

Already popular overseas, Bankwest recently introduced capped rate home loans to Australia. While the Bankwest Capped Rate Home Loan can go lower, borrowers won’t pay more than the cap of 7.5% until 10 November 2012. However, the interest rate is slightly higher than the lowest rates on the market.

Unlike a fixed rate home loan where the borrower wears the risk that market rates won’t catch up to fixed rates, a capped rate loan shifts the risk back to the lender. As Bankwest’s Head of Mortgages Dean Gillespie explains, “This product has been specifically designed to offer customers the opportunity to make the most of the current low interest rates, whilst the cap will provide peace of mind when rates rise.”  It’s a style of loan we could see more of as rates climb higher.

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