Fixed interest rates too good to pass up, say experts

By Su-Lin Tan

July 25, 2014 – 7:38AM

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Heading north: Experts are tipping interest rates to rise next year.Heading north: Experts are tipping interest rates to rise next year. Photo: Frances Mocnik

Home loan customers should take advantage of low fixed interest rates and lock in now, experts say.

The Commonwealth Bank, National Australia Bank and Westpac on Wednesday cut their longer-term ­interest rates to below 5 per cent.

ANZ was the only one of the big four banks not to lower its five-year fixed mortgage rate to 4.99 per cent this week.
ANZ was the only one of the big four banks not to lower its five-year fixed mortgage rate to 4.99 per cent this week. Photo: Supplied

CBA was the first to lower its five-year fixed mortgage rate to 4.99 per cent. NAB and Westpac followed suit.

“Competition in this market has finally bred benefits for consumers; 4.99 per cent on a five-year home loan is very sharp. It is an excellent deal,” said Alex Parsons, chief executive of interest rate research company RateCity.

“Will rates keep coming down? No. Non-banks have had below 5 per cent for a while. Now banks have joined in.”

Interest rate advisers all agree conditions are ideal for a switch to fixed rates.

“Our monthly Reserve Bank surveys say the interest rate is due to rise in the next year. It is likely that the interest rate will drop before rising again to normal levels, but at the moment this is a good rate,” Finder.com.au spokeswoman Michelle Hutchison said.

“Historically, cash rates have been around 5 per cent and interest rates another 2 per cent higher. So we are now near the bottom of the cycle.”

Rates may drop before they rise, but borrowers are better off locking in the rate now rather than speculating.

“Even with a possible rate reduction you still get comfort from hedging your bets against the possibility of rates ­eventually going up,” 1300 Home Loan managing director John Kolenda said.

AMP Capital’s chief economist Shane Oliver, agreed, saying economic indicators showed borrowers needed to take advantage of the low rates.

“Fixed rates are normally higher. Average inflation tells me the RBA will not stay at the current rate,” he said.

Rate rise likely in nine months

Dr Oliver predicted a rate rise was likely to be about nine months away, around the June quarter next year.

“The banks are offering this deal because they can. Costs of borrowing have dropped and are consistent with Australian bond yields falling.”

A combination of economic factors including improvements in the global capital market with lower spreads have resulted in the cheaper cost of money.

“Last year some mortgage providers were already doing 5 per cent. So to avoid losing market share, the big banks have joined in,” Dr Oliver said.

He cautioned the low rate deals may not last because banks would have only a limited amount of money at low rates.

But Mr Kolenda said borrowers must be sure they are switching for the right reasons, such as certainty of repayment and peace of mind rather than as a speculative play on where rates are going to move.

“Many committed to fixed rates just before the global financial crisis and watched the rate drop to a low of 3 per cent,” he said.

Fixed rates are also not ideal for ­people on high salaries.

“If you lock it in now, and want to repay chunks of the loan, you may have break costs. Also, are you upgrading your loans, or having another child?” Canstar research manager Mitchell Watson said. He recommended splitting loans between variable and fixed rates to “get best of both worlds”.

Interest rate adviser Mozo is more conservative, saying consumers must watch the rates for the next few weeks.

“We may not be at the bottom yet,” director Kirsty Lamont said. “This is the start of what will be more pressure on fixed rates. Other lenders will match if not undercut the rates.”

Westpac urged to close 200 branches

July 10, 2014 – 10:54PM

Banking reporter

JPMorgan analysts say the ST George brand acquired in 2008 is proving a drag on Westpac.

JPMorgan analysts say the ST George brand acquired in 2008 is proving a drag on Westpac. Photo: Peter Morris

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Westpac’s “multi-brand” strategy is facing a fresh round of market criticism, with JP Morgan analysts saying the bank should consider closing up to 200 branches in a bid to cut costs.

In a note to investors, analysts led by Scott Manning said the branches acquired when Westpac bought St George in 2008 were a drag on the business, and Westpac generated a third less profit per branch than its rivals the Commonwealth Bank and ANZ.

The report also argued the bank may have to ultimately reconsider its strategy of offering customers a range of brands including St George, BankSA, Bank of Melbourne and RAMS.

It came as consequences of the Commonwealth Bank financial planning scandal continued to be felt, with Standard & Poor’s saying it was monitoring the situation but the bank’s credit rating would be unaffected.

After reviewing Westpac’s distribution footprint, the JP Morgan analysts said that despite its large branch network, Westpac had not made significant efficiency gains.

One response would be to shut down the St George brand outside NSW, resulting in the closure of about 50 branches. The bank could also shut a further 150 branches across its network in areas where there was overlap between its brands, or in locations not suited to the bank’s demographic target market, the report said.

It estimated the closures would save $400 milllion a year, but still keep the “mutli-brand” approach alive.

In the longer term, it argued the strategy of promoting a range of brands should be revisited as the bank responded to digital innovation in banking, which is prompting customers to bank online.

Analysts have previously questioned the merits of Westpac’s “multi-brand” approach – which is also used by Commonwealth Bank via its Bankwest brand and NAB through online lender UBank.

But Westpac has remained committed to the strategy, which it says allows it to reach customers who do not want to bank with a “major” lender.

A Westpac spokesman declined to comment on the report, but the bank has repeatedly stood behind the multi-brand approach.

In May, St George chief executive George Frazis argued that its “non-major” brands were playing a key role in the banks’ attempt to grow its loan book more quickly.

St George – which includes Bank of Melbourne, BankSA and RAMS – was one of the strongest performing units within Westpac’s latest half, posting 12 per cent annual growth in profit, to $772 million. Westpac also has the lowest expense-to-income ratio of the big four.

Meanwhile, Standard & Poor’s said the Commonwealth Bank’s AA credit rating would be unaffected by the customer compensation for customers of its financial planning arm.

“At this stage, we believe that it is unlikely that any potential monetary compensation for customers stemming from the program would be sufficiently large enough to affect our view of CBA’s stand-alone credit profile factors. We will, however, continue to assess ongoing developments relating to these matters,” S&P said in a statement.

It is the latest reaction to a scandal that involved fraud by a group of planners between 2006 and 2010.

So far the bank has paid out $52 million in compensation, and has not said how much more it expects to pay out.

The Commonwealth Bank has yet to reveal key details about its compensation arrangements, including who it will appoint as customer advocates and who will sit on the independent panel overseeing the scheme.

Australian dollar higher against weakened greenback

On Friday morning, the dollar was trading at 94.15 US cents.

On Friday morning, the dollar was trading at 94.15 US cents. Source: Supplied

THE Australian dollar is higher against the weakened greenback following more disappointing economic data out of the US.

At 0700 AEST on Friday, the local currency was trading at 94.15 US cents, up from 94.12 cents on Thursday.

Consumer spending, which accounts for more than two-thirds of US economic growth, rose a mere 0.2 per cent in May, official figures showed, while the US Federal Reserve’s preferred measure of inflation remained subdued.

That followed disappointing economic growth figures released earlier in the week.

“The greenback was under pressure throughout the US trading session,” BK Asset Management managing director Kathy Lien said. “Even though St Louis Fed president James Bullard said the markets should be pricing in rate increases based on (Federal Reserve head) Janet Yellen’s recent comments, Treasury yields declined, indicating that investors are not convinced that the central bank is ready to tighten.

“We expect trading ranges in the foreign exchange market to remain intact.”