The time is near for capped rate loans

Capped rate loans about to come into vogue.

Wednesday, May 23rd 2001, 12:00PM

by Jenny Ruth

If past experience is any guide, about now or very soon WestpacTrust is likely to see a surge in demand for its capped-rate home loan products.

But now is about the worst time to buy them if your aim is to lower the average cost of your mortgage over time, according to WestpacTrust home loans product manager David Cunningham.

"Our experience is that caps are most popular at the bottom of the cycle. Customers tend to fix loans at the very top and float at the very bottom," he says.

Instead, he reckons they should be doing the opposite.

Late last year, ''before the (central) bank started easing, we were writing lots of fixed-rate loans. That’s the ideal time for a cap," he says.

Buying a capped product in a rising interest rate environment and preferably at or near the top of the cycle protects the customer from further rises but also allows them to reap the benefits if interest rates fall, Cunningham says.

Taking out a fixed-rate loan in that environment commits the customer to paying near top of cycle rates.

When interest rates are falling, and when it looks like they won’t fall much further, taking out a capped loan will still protect you from rising interest rates but it will cost the customer more than taking out a fixed-rate loan.

WestpacTrust and its predecessors, Westpac and Trust Bank, are the only banks to consistently offer capped home loans.

Spokesman Peter Thornbury says capped loans make up less than 10% of WestpacTrust’s mortgage portfolio but the bank has stuck with them as mainstream products.

The bank offers capped terms for one, two or three years and charges customers 0.5% more than the floating rate at the time the customer caps. An added advantage of capped loans is that, unlike with most fixed-rate loans, customers can make lump sum payments without penalty. They can also switch into a fixed-rate loan without penalty.

For Trish McCarthy, managing director of mortgage broker Mortgage Choice Otago, it’s that flexibility which is the most attractive aspect of capped loans.

"It gives people security and flexibility without the worries of a floating rate," she says.

She agrees fixed-rate loans are probably the best option near the bottom of an interest rate cycle, "as long as you don’t need that extra flexibility."

Nevertheless, McCarthy has noticed that interest in capped loans has gone from negligible to just starting to pick up again.

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