To Fix or Not to Fix. That is the Question!!

To Fix or Not to Fix. That is the Question!!

Post by David Wright

Hello again!

My last blog was about how now is the best time to get in and flog your loans down because interest rates are so low. At the end of that message I promised to give you some info regarding fixed interest rates this time.

My personal experience has been all negative regarding fixed interest rates. I locked in at 15% when the variable rate was 18% but the variable rate soon dropped and I ended up paying a penalty to unlock. Then I locked in at 9% and the same thing happened.

I asked myself the question; “Why do banks offer fixed interest rates”? “Is it because they want to help me pay less interest”?

I realised I’d have to be a goose to believe that!

So I have personally decided it would have to be a very convincing case before I would ever lock interest rates on a mortgage again.

I asked my personally trusted and long standing mortgage broker, Paul Muller, what his thoughts are in the current climate. Paul’s Dad used to work with my Dad in what is now known as the financial planning industry so there is a strong relationship between us and he has always been a very reliable and trustworthy advisor to me on borrowing matters. He has done many property deals himself so he knows what works and what does not.

Here is what he had to say:

Fixed V Variable:

To fix or not to fix that is the question!

With current fixed rates at record lows and variable rates trending down, what is the best advice when it comes to what to
do with your loan?

Ultimately it depends on your individual situation but to determine what is best for you it may pay to talk to someone in
the industry to find out what is available and to tailor a solution to your specific needs.

Fixed rates are great for people who want to be sure what their payment amount will be for a defined period of time. These loans tend to be less flexible and can attract fees for exiting early so it is important to look at the length of the fixed term period and make sure this is worked around any future plans you may have. Currently we are seeing rates as low as 4.83% for a 3 yr fixed rate loan term which represents great value for either owner occupied or investment loans.

If you pay off a fixed rate loan early there is a chance you will pay a penalty. This is because you have contracted a specified amount of money at a particular rate for a certain time.  On the flip side the bank will usually have contracted to buy that money at a certain rate and term so if they have to pay it back early there can be an associated cost to them
which naturally they will pass on to you.

The penalty amount will depend on the amount involved, the time remaining and the rate which was originally agreed upon compared to the current rate. Whilst the bank is quick to pass on the penalty if rates go down they seldom pass on any benefits if rates go up from what they were locked in at!!!!!

Variable rate loans are more flexible and allow for greater features including redraw and offset facilities and don’t normally attract any exit fees for paying off early.  Currently you should be looking at variable rates around low to mid 5’s but this is dependent on how much money you owe (The more you borrow the better the rate).

Currently the best solution may be that of a little from column A and a little from column B (some fixed and some variable). Most banks offer the ability to split a loan and do a portion fixed and a portion variable. This gives you the surety of the rate whilst also having some flexibility as well.

Generally speaking, most banks will offer a package type arrangement for an annual fee (usually around $400pa). This will provide for nil loan approval fees, discounted interest rates, fee free offset account, fee free credit card, and some other benefits.  This is normally the best option when it comes to splitting a loan as you will not have to pay for multiple approval fees and it will allow for changes going forward.

Whilst it is almost impossible to pick the top and bottom of the interest rate cycle, as long as you are comfortable with the
amount you have to pay each month the interest rate is just another number. In saying that, with rates at record lows and the fixed rates lower than current variable rates, now is a great time to review what you are paying and see if you can save some money.

My advice (if you’re asking):

Shop around and see what is on offer or talk to a broker (preferably me) to see what is out there.

Review your loans every 1 – 2 yrs as discounts and rates change often depending on the competition and current market

Consider your goals and reasons for the loans before committing to longer fixed rate periods so as to avoid any early payment penalties.

Paul Muller.

So there you have it! You should be talking to your mortgage broker regularly to make sure you are getting the best deal that suits you (which may include fixed interest rates).

If you don’t have a personal mortgage broker that you know and trust and who is familiar with your situation I certainly would recommend Paul (who has just recently become Dad to a little baby girl).

You can contact Paul at Auscredit in Maroochydore on 07 5452 9000. I phone him often for advice and he knows my affairs well enough to be instantly able to give me valuable input on what I am thinking of doing next.

Predicting Future Interest Rates

To finish off today, here is my personal formula for predicting future interest rate directions!

I compare the current variable rate with what is on offer as a fixed rate.

Knowing that the banks are there to make a profit it is clear they are not going to offer a fixed rate that they think will lose them money.

If the fixed rate on offer is lower than the current variable rate, clearly they feel the future rates will be even lower still and they are offering a rate that will entice borrowers who are worried that rates might go up or who are trying to squeeze even more out of their dollar than with variable rates allow.

(The banks are not going to offer a lower fixed rate if they think the trend is upward – they are there to make a profit for their shareholders not to be overly generous to borrowers!)

If the fixed rate on offer is higher than the current variable rate, clearly they feel the future rates will be even higher still and they are offering a rate that will attract nervous borrowers who are worried rates will go up.

Ask me in 50 years if my formula worked or not!

That’s all for today!