The Business

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Aussies look to US home loan model

Updated May 24, 2012 00:52:22

Some are questioning whether the US home-loan model - involving 30-year loans on fixed interest rates - could work in Australia.

Source: The Business | Duration: 3min 27sec

Topics: banking, markets, international-financial-crisis, australia, united-states


TICKY FULLERTON, PRESENTER:  In Australia, as we know, borrowers sweat on each decision made by the Reserve Bank on interest rates, but in the United States it's a different story. There, home buyers can lock in a 30-year fixed loan at an interest rate just under 4 per cent. It sounds too good to be true and has led some Australians to wonder whether a similar product could work here. Emily Stewart investigates.

EMILY STEWART, REPORTER:  Most Australian home owners take a punt on the official cash rate, with more than 80 per cent signing up to variable loans. That's in stark contrast to buyers in countries like the United States.

SAM WYLIE, MELBOURNE BUSINESS SCHOOL:  About 75 per cent of all loans in the US are 30-year fixed rate loans. And around the world it's mixed; in some countries like the US, Switzerland, Germany, Denmark, Japan, mortgages are fixed, but in many countries they're floating like they are in Australia.

EMILY STEWART:  However since the Global Financial Crisis more and more Australians are turning to fixed mortgages.

DAMIAN SMITH, RATECITY:  The rates are actually really attractive. We're at historical lows when you compare fixed rates to variable rates. The second reason is there's uncertainty. Remember banks are now moving more or less independently of the Reserve Bank.

EMILY STEWART:  The most popular fixed term is three years and the longest fixed loan available is 15 years. So would a 30-year fixed loan product work in Australia?

SAM WYLIE:  I think there would be quite a demand for it. Young households don't want to bear that long-term interest rate risk. They've got enough risk associated with their employment and paying their mortgages off without having to worry about interest rates going up a lot.

MIKE HIRST, MD, BENDIGO BANK:  In theory, if we got a deep, long-term fixed interest market and the derivative or swap market off the back of that enabled hedging, then yes, it could work. But the reality is that we're a million miles away from that. We don't have a very deep fixed interest market. Our term debt is really restricted.

EMILY STEWART:  So why does it work in the US? Well when employees retire, they draw pensions from their former companies. In other words, these companies carry long-term liabilities and banks match these up with long-term assets like mortgages.

SAM WYLIE:  The bonds that are issued by Fannie Mae and Freddie Mac, they're the big government-backed securitisers, they have been used around the world as if they were sovereign bonds because they're backed by the US.

EMILY STEWART:  In Australia, Sam Wylie sees a role for the Government in better aligning the retirement system with the mortgage market.

SAM WYLIE:  If the Government insisted that retirees buy annuities, then the people who were selling those annuities would have to match their liabilities - they annuities they've sold with assets. So they'd have to buy long-term bonds to make the annuities work.

EMILY STEWART:  Even if the long-term product was possible, the Bendigo Bank's Mike Hirst warns Australians shouldn't expect such low rates as in the US.

MIKE HIRST:  There's actually a 4 per cent spread between the official cash rate or the overnight rate and the 30-year bond rate. So if you put that in place in Australia, with a cash rate of 3.75, then you're looking at an 8 per cent base rate before you even put the credit in. So, the rate might come in at say 10 per cent, or probably higher, 12 per cent, which is gonna be much higher than the standard variable rate.

EMILY STEWART:  So for now, no doubt Australians will continue to watch every move by the RBA with interest.

TICKY FULLERTON:  There you have it.