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Will Australia ever see 10-year fixed home loan rates of 2.75pc?

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A fixed home loan rate of just 2.75 per cent for 10 years at first glance seems unreal to Australian homebuyers. But it's commonplace in the UK as lenders wrestle for new customers at a time when the Bank of England has kept its official cash rate at 0.5 per cent since early 2009 after the carnage of the financial crisis.

Do extended periods of low interest rates merely fuel a house price surge because just about everyone decides to borrow more, because they can? Competition for properties in inner-city suburbs in Sydney and Melbourne is generally still fierce as debate continues to rage about whether Australia's major cities are in the grip of a house price bubble. Controversy over the notion of banks being at risk of the "Big Short" shows no sign of abating.

Stephen Koukoulas, the managing director of Market Economics, says long periods of low home loan rates do lay the foundation for strong house price growth, but other factors such as demographic changes and the level of immigration are also influential.

"It is one of the drivers and an important influence," he says.

He says overall mortgage repayment levels tend to stay around the same on a relative basis as homebuyers crunch their numbers as to what their household can sustain. If rates fall a long way then the amount that can be borrowed rises, but the proportion of household income needed for repayments and the "level of pain" won't shift much.

Just before Australia's last recession in 1991, home loan rates were at 17 per cent in 1990, but the average mortgage was at $71,000. The latest ABS figures show the average mortgage size is now $441,000 in NSW.


Japan a potent symbol

Mr Koukoulas points to Japan as being a potent symbol that low rates alone can't keep pushing up house prices. Falling population and shrinking numbers in the homebuyer sweet spot age group make a mess of that argument. If there are 990,000 people wanting to buy, but one million properties on the market, there is a problem. "You've got a glut of properties no matter what," Mr Koukoulas says.

Experts say fixed home loan terms in Australia longer than two or three years haven't ever really taken off, unlike in the northern hemisphere where much longer terms are more popular.

A range of lenders in the UK are now offering 10-year fixed home loans running out to 2026 at very cheap rates by Australian standards. Leeds Building Society has an offer in the market of 2.75 per cent, while First Direct and TSB both are sitting at 2.89 per cent. In the UK market, those with a fatter deposit will get a much better deal on both fixed and variable rates on a sliding scale, but even taking into account the complexities of how banks price their fixed rates by making a bet on the future, those rates are very low compared with what's on offer in Australia.

Figures from Canstar show a number of Australian banks do offer 10-year fixed rate terms. ANZ advertises a 10-year fixed rate of 7.69 per cent for owner-occupiers and it drops to 7.04 per cent for a loan bigger than $500,000. The Westpac-owned RAMS business has a 10-year fixed rate of 5.79 per cent.

With the Reserve Bank of Australia having kept the cash rate at 2.0 per cent since May, 2015, most standard variable rates from banks sit around the 5.5 per cent to 5.6 per cent market. That's before special discounts for packages, and for customers with good negotiating skills, which drop them into the bracket of having a four in front of them, so it's understandable that the appeal of a 10-year fixed rate of 7-plus per cent for a local homebuyer is limited.

It's a case of how low can they go in the UK, for those with dreams of picking up a terrace in Notting Hill and locking in a low rate for a decade. But for a young couple busting to buy a renovator's delight in Leichhardt in Sydney's inner-west, trying to pick where home loan rates and house prices might be in 2026 might be beyond anyone's capability.