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Massive rate hikes lie in wait

http://www.news.com.au/business/money/stor...5016199,00.html

FOR the past three years, they have breezed through each interest rate rise, their beatific serenity at odds with other mortgage holders who have been bludgeoned without ceremony closer to Struggle Street with each hike.

They are the estimated 30 per cent of Australia's mortgage holders who chose to fix their rates after the Reserve Bank lifted its cash rate to 5.5 per cent in March, 2005.

Over the previous four years, after the cash rate hit a low of 4.25 per cent in December, 2001, the bank had slowly increased the price of money.

Up to 4.5 per cent in April, 2002; up to 4.75 per cent in June, 2002; up to five per cent in November, 2003; then, with a jolt, up again the next month to 5.25 per cent.

By March, 2005, when the rate hit 5.5 per cent, the trend had been noted and these people fixed their loans, mostly for three years, with many getting a highly competitive interest rate of about six per cent.

But now, according to property group Raine & Horne, they are about to have those serene smiles wiped off their faces.

The group's general manager of financial services, Gary Lees, says those who fixed for three years in 2005 will have to revert to the standard variable rate as soon as the fixed loans expire. And it's going to hurt.

"They will find that their interest repayments will rise by a whopping 50 per cent.

"The Reserve Bank has increased interest rates eight times since 2005, which borrowers who locked into fixed-rate loans have been immune to until now,'' Raine & Horne chief executive Angus Raine said.

"However, 30 per cent of Australians with mortgages will shift from fixed rates of about six per cent to standard variable rates nudging nine per cent.

"They will basically face the prospect of three years worth of interest-rate hikes and this will rock many household budgets.''

Once the fixed term expires, the loan automatically reverts to the standard variable rate.

At present, the standard variable rate ranges from a very generous 8.24 per cent, from non-bank lender the Sydney Credit Union, to 9.47 per cent -- compared with the Reserve Bank's current cash rate of 7.25 per cent.

"On a 25-year interest-only mortgage of $350,000 at six per cent, a homeowner will be making monthly repayments of about $1750,'' Mr Lees said.

"If the rate jumps to nine per cent, the monthly repayment is $2625. This is a significant increase of $875 -- or 50 per cent.''

But Mr Lees suggests that if homeowners take the initiative they can lessen the pain.

They should simply ask their bank to give them a discount on the rate, he says.

"Depending on their negotiating skills, most of the time they can get a discount on the standard variable rate of 0.25 to 0.7 or 0.8 per cent,'' Mr Lees said.

"Don't accept the revert rate. Talk to your lender, ask for a discount or say you will take the business elsewhere.''

He said the borrower may have to concede some features of the standard variable rate, such as the availability of offset and redraw facilities.

"But most of the time we've found they don't lose anything,'' Mr Lees said.

These discounts, referred to in the industry as professional loans -- even though they are available to people in all walks of life -- are generally limited to those who have a loan of $250,000 or more.

"But we have been able to negotiate deals on loans of less than $250,000,'' Mr Lees said.

if cutting a deal doesn't work, the homeowner can ditch the frills and go for a basic variable-rate loan, which ranges from 8.5 to 8.9 per cent. Or change lenders.

"If you're off a three- or five-year fixed rate, then the early-discharge fees imposed by many lenders normally won't apply if you decide to switch lenders,'' Mr Lees said.

How to lessen the pain

* Ask your lender for a discount on the standard variable rate. Many lenders will consider discounts from 0.25 per cent up to 0.8 per cent.

* Switch to the basic variable rate which ranges from 8.5 per cent to 8.9 per cent. This is the no-frills loan with no extras such as the availability of redraw and offsets

* Change your lender. The Sydney Credit Union is lending money with interest as low as 8.24 per cent.