Anxious borrowers beware: time to lock in gone

The time to fix your mortgage rate has long gone, an Infochoice spokesman said yesterday. Home buyers who are worried about rising interest rates and think they should fix their mortgage rates should think again: banks have capitalised on this fear recently and have more than doubled their margins on fixed rate home loans.

The fear of rate increases has worked well for the banks: they're still attracting borrowers but have also increased rates, while their actual lending costs have fallen. Three weeks ago, the Commonwealth Bank and the National Australia Bank lifted their three-year fixed rates to 6.89 per cent, but during that time the banks' underlying costs fell by about 0.3 per cent due to a fall in the costs of borrowing on the international bond market.

The ANZ's David Munro said that home loan rates are fixed at a margin above relevant bond market rates; recently it's been between 0.8 and 1.1 per cent above bond rates. But bank sources say that a “true competitive margin” for fixed rate loans is closer to 0.5 per cent. So for fixed rate loans from one to five years, the margins between banks' rates and their costs of borrowing have effectively doubled to about one percentage point. Margins on 10-year fixed rate loans have increased to about four times the competitive level. This recent trend is at variance with the situation over the past couple of years, when margins on fixed rate home loans have been more competitive than variable rate loan margins.