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Borrowers mull fixed mortgages as rates rise

 January 15, 2010

Interest rate rises are on the way; so should you brace for the variable hits or cover your back and lock in a fixed rate?

As the economy turns a corner, economic commentators are in two minds about whether borrowers should fix their mortgage at a relatively high interest rate or sign up for an historically low variable option.

Economists predict we are looking at a fourth consecutive rate rise after a surprise surge in jobs on Thursday showed yet again the strength of the Australian economy. The national unemployment rate fell to an eight-month low of a seasonally adjusted 5.5 per cent in December, down from a revised 5.6 per cent in November.

Some economic commentators are even forecasting a 50 basis point interest rate increase when the Reserve Bank board meets on February 2. Housing Industry Association chief economist Harley Dale said any decision to fix or go variable depended on an individual's financial circumstances and how they felt about a level of certainty. "If you feel as though you need some more certainty and wonder whether you should lock in or not, I guess on the one hand, to an extent, the horse has already bolted," Mr Dale said. "Fixed rates went a long way in the first half of 2009 from a very low level so at the moment you're probably still best off with a variable rate." However, he said there were some people who felt Australia could be looking at central bank interest rate rises of more than 25 basis points. "Maybe, if you're looking out at the next couple of years, maybe we're going to get more of a tightening cycle than people first thought because we're going to be rapidly moving back towards a very strong economy," he said. "If you're taking that kind of view and you need peace of mind, then maybe you should be reassessing your view now as to whether you want to lock in part of your mortgage."

Meanwhile Canstar Cannex senior financial analyst Harry Senlitonga said there was currently on average about a 1.1 per cent difference between standard variable mortgage rates and the most popular three-year fixed interest rate. His company, which compares mortgage rates, presented two perspectives on fixing to borrowers, with the first group asked to treat fixing like an insurance policy while the second group was encouraged to save money by fixing early. "We expect the fixed interest rate will increase in the next couple of weeks," Mr Senlitonga said. In order for borrowers to get ahead on a fixed loan, variable interest rates would have to overtake the fixed rate within 18 months during a three-year fixed period. "Say you're paying $400 extra a month for 18 months, to make it break even, you'd have to be better off $500 a month in the second half of the three years." He said some borrowers were happy to pay a premium to cap the maximum they would have to pay per month. "If they pay extra, that's an insurance premium. Everyone pays insurance these days."     AAP.

Unemployment rate falls to 5.5pc in December, ABS says

  * By staff writers   

  * From: news.com.au    

  * January 14, 2010 11:41AM 

The unexpected fall in the jobless rate has increased the chances of a fourth consecutive interest rate rise by the Reserve Bank next month, economists say. 

The unemployment rate fell to 5.5 per cent in December, the Australian Bureau of Statistics said, as the economy added far more jobs than predicted. It's a better-than-expected result, and will surprise experts who forecast unemployment would rise to 5. 8 per cent, and tipped the economy to create just 10,000 jobs.

Instead, the number of people with jobs jumped by 35,200 to 10.9 million, thanks to a rise in part-time jobs. Part-time employment rose by 27,900 jobs. The economy added 7300 full-time jobs in December, bringing the number of Australians in full time work up to 7.6 million. NAB senior economist David de Garis said the figures showed the labour market had "unambiguously turned the corner". 

"It is rather a compelling picture now that employment, which is usually regarded as a lagging indicator, has picked up rather quickly in the past few months," Mr de Garis said. "It has broken out of that 5.7 per cent to 5.8 per cent range as it has been stuck in since May." Growth in the labour market increased the likelihood the RBA would lift the overnight cash rate by 25 basis points to 4 per cent on February 2, said Mr de Garis. "The Reserve Bank has done some heavy lifting so far to remove the emergency rate cuts, but it looks like their job has not finished yet," he said. The RBA lifted the cash rate by 25 basis points to 3.75 per cent on December 1, following similar moves in October and November. ICAP senior economist Adam Carr said the data reflected the healthy state of the economy and ensured a fourth consecutive rate rise. "I was expecting a small negative ... but this suggests we're looking at a very healthy labour market," Mr Carr said. "A February hike is a done deal." The pace of rate rises this year depends on how banks react to another 25 basis point rise in February, Mr Carr said.

CommSec chief economist Craig James said the jobless rate would fall short of Government expectations of 6.75 per cent unemployment by the June quarter. "It should now be clear to all and sundry that the unemployment rate has peaked," CommSec chief economist Craig James said. "Not only has unemployment fallen for two straight months but the data on job ads show that employers are actively hiring new workers.'' Mr James said the economy was still growing at a sub-standard pace, and the RBA would lift rates to a "neutral" level of 4.25 to 5.0 per cent in 2010 as growth picked up. TD Securities senior strategist Annette Beacher said the labour market had performed better than past downturns. "If the unemployment indeed peaked in the third quarter of 2009, it is extremely low compared with 10.4 per cent in late 1983 and 10.9 per cent in late 1992," she said.

The jump in jobs mirrors the improvement in private surveys of job ads, Ms Beacher said, with an ANZ survey this week showing job ads rose 6 per cent in December. Workforce participation was steady at 65.2 per cent, but the number of hours worked dipped slightly last month, the ABS data showed.  AAP.