Fixed rates bank fave as DEF ban bites

by Adam Smith03 Apr 2012

An analysis has claimed recent rises in fixed rates have been a response to last year's unilateral ban on exit fees.

The past six months of fixed rate competition have seen nearly one in 10 borrowers opting for fixed rate products, according to research from Canstar. Inverted yield curves have increased the profitability of the products for banks, but one industry figure has drawn a correlation between banks' fixed rate the DEF ban.

“Many lenders have been offering fixed rates lower than their variable rates since August last year, following the banning of exit fees for variable loans on July 1, making fixed loans more valuable to lenders,” RateCity chief executive Damian Smith said.

In analysis carried out for News Ltd., RateCity has claimed recent upward moves on fixed rates were attempts by banks to offset the cost of the government's exit fee ban. Banking representatives, meanwhile, told News Ltd the moves on fixed rates were solely a response to shifts in the yield curve and the expectation of steady rates from the RBA.

Regardless of the reason, Smith said fixed rates were beginning to rise from the unusual lows seen last year. Canstar’s research indicates that lenders have dropped three-year fixed rates an average of 111bps since June last year, but Smith said the trend is not set to last much longer.

“We’re in a historically unusual phase, where 92% of lenders in RateCity’s extensive database currently have three-year fixed rates lower than their standard variable offering. But in the long run, we wouldn’t expect three-year fixed rates to be below variable rates, so it’s not surprising to see these rates start to creep upwards,” he said.

Indeed, Smith said, fixed rate pricing is already beginning to rise, with lenders such as ANZ, Suncorp and Citibank lifting the rates in recent months

“Three-year fixed rates are starting to rise for the first time in 10 months. The average three-year fixed rate – which is the most popular fixed term by borrowers – is the highest it’s been since December 2011, at 6.36%,” he said.

In light of the movements, Smith urged borrowers considering fixed rates to lock in now, before the rates continue their creep upward.

“While over a full cycle, the lowest possible variable rate tends to be the right option for most borrowers, for those looking for absolute certainty in rates and therefore repayments, locking in a low three-year fixed rate might be attractive right now,” he said.

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