June 05, 2012
Variable interest rate home loans were the product of choice for almost four out of every five new borrowers in May, a month when the Reserve Bank sweetened the appeal with a 50 basis point cash rate cut.
Borrowers' preference for variable rate loans rose marginally, by one percentage point to 79% of all new home loans last month, according to national loan approval data from Australia's largest independently-operated mortgage broker, Mortgage Choice.
The biggest increase in variable rate loan demand was recorded in SA (up 12%, to 85%), followed by NSW (up 4%, to 77%), WA (up 1%, to 79%) and QLD (up 1%, to 74%). The only state to buck this trend, VIC saw the popularity for variable rate loans drop by five percentage points, to 86%.
Company spokesperson Belinda Williamson said, “The Reserve Bank's decision in May to cut the cash rate by fifty basis points, combined with speculation around further rate cuts, is likely to have fuelled borrowers' appetites for variable rate home loans. Price-sensitive borrowers more than likely found comfort in lenders' decision to pass on majority of the rate cut savings to variable rate borrowers.”
“Out of all the variable rate home loan types, basic variable rates - which tend to be more affordable but less flexible with fewer features at the borrower's disposal - were the only loan product to gain in popularity over the month, with demand rising to 17% in May from 14% in April.”
“The increased interest in basic variable rate loans, which is now at a nine-month high, could signal a return to the market by first homebuyers, as these loans tend to be more popular with lower income and less experienced borrowers who are still finding their feet in home loan market.”
“Victorian borrowers were the only group to record a fall in variable rate demand and a rise in fixed rate popularity. This more conservative approach by a growing number of borrowers may again be linked to an increase in price-sensitive first homebuyers entering the market now to beat the removal from 1 July of the state's First Home Owner Bonus and Regional Bonus, and wanting the security of a fixed repayment level.”
Fixed rate loan demand fell nationally to 21% from 22%, despite a number of lenders dropping their fixed rate pricing below 6%.
“The biggest tumble in May of fixed rate loan popularity took place in South Australia. There, fixed rate loan interest was down 12% compared with April. South Australians are wholeheartedly embracing recent variable rate cuts, and appear to have more faith in the general interest rate outlook,” said Ms Williamson.
Ongoing discount rate loans - where the interest rate is discounted over the entire loan term, usually in exchange for an annual fee - made up 40% of all variable rate loans approved in May. This was in line with April, but slightly below the six-month and twelve-month average of 41%.
Demand for standard variable rate loans was steady at 19%, ahead of the six-month average of 17% and the 12-month average of 18%. Meanwhile, line of credit loan popularity was at 3%, down from 4% in April and borrowers' preference for introductory rate loans remained below 1%.
Note: Mortgage Choice currently writes almost one in every 20 new home loans in Australia, equating to approx. $10 billion in approvals per year, hence it provides a clear insight into borrower preferences. The 19 year old mortgage broker has a loan book of over $42 billion.
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