Fix Em

The Reserve Bank of Australia’s (RBA) decision to hold official interest rates at 3 per cent this week should prompt more borrowers to fix their lending obligations, both business and personal.

Borrowers though should not be trying to pick the exact bottom of the interest rate cycle, and there needs to be encouragement from banks and government for borrowers to fix lending commitments, with an essential focus on first home buyers.

Analysis in the CoreData Australian Mortgage Report, shows just 2.4 per cent of owner occupied lending, both first home buyers and those with an existing property, elected to fix their interest commitments in March 2009.

This is not a new trend, with only 3.6 per cent of all owner-occupied lending for the six months to March being fixed, with the problem in the first home buyer detail.

Inexperienced first home buyers continue to inflate the property market at the lower end, evidenced in the average loan increasing 9.6 per cent to $286,000 for the six month period ending March.

First home buyers, in the rush to get onto the property ladder, are effectively paying a future value for their residential asset, funding the purchase with residential loans at unsustainable interest rates near 50 year lows.

Glenn Stevens, RBA governor acknowledges this, adding ‘mortgage rates are at very low levels by historical standards’, highlighting monetary policy will at some stage rebalance back to higher levels.

If the financially inexperienced home buyers are not encouraged to fix repayment commitments on an inflated asset, then as interest rates increase in the future, which they invariably will do, a new class of debt laden typically young individuals will be stuck servicing a loan with a rapidly increasing percentage of net income.

And so the bubble builds again.