To Fix Or Not To Fix
Posted on October 13, 2009
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That is the question. With variable rates recently at 50 year lows and now starting to move upwards (beginning with a 0.25% increase last week), the question many people are now asking is should they fix their loans? As 3 year fixed rates are already at an average of around 7% and the discounted variable rates are around 5.3% there is currently a valid argument that it’s now too late to fix. However this argument assumes you are using fixed rates to try and out guess the market to get the cheapest rates, as opposed to a risk management strategy.
The argument is that banks, which employ teams of economists and allegedly know more than the average person, have already factored in what will happen with rates in the future. Meaning, that fixed rates already reflect the likely increase you will pay in the next few years.
What is often overlooked is the affordability of your loan should rates start to go much higher than anticipated. So for example - if your loan is $450,000 over a 30 year term and the rates went from 5.3% to, say, 9%(as they were only 12 months ago), the difference in principal and interest repayments would go from $2498 per month to a whopping $3620 per month. It’s quite clear that when considering whether to fix, hedging for the cheapest rate must not be the sole consideration - you must factor in the maximum monthly repayment threshold that you can afford.
Of course, Banks carry out affordability checks at the time of your loan application, however they generally use a buffer of around 1.5% over the current variable rate. Because variable rates are currently so low it’s especially important to be aware of how high a rate you could tolerate before you would need to fix. Rate calculators are freely available on the www.mfaa.com.au site. If you can afford a very high rate if rates went crazy, then you can afford the strategy of out-guessing the market described above, and for those who can afford the risk, it is fine to do.
However if you can’t then you need to watch rates very carefully available free at www.infochoice.com.au . A common risk strategy is to ‘split’ your loan, part fixed and part variable. Ask your broker to help discuss these concepts for you. Either way its good practice to understand the risks you are taking, especially if you are a recent first home owner and not yet used to the impact of higher rates.
So what do you think, should you fix your loan?
By Virginia Graham from www.modelmortgages.com.au
One more Budget Update
Posted on May 12, 2009
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MMM radio interview comes out today!
New website relaunch
Posted on May 12, 2009
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Model Mortgages new website will be relaunched tommorow. I would love to know any suggestions you might have.
Ginny’s Special Rate Alert
Posted on May 12, 2009
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Fixed rates futures haveedged up again today
Ginny’s Budget Review
Posted on May 12, 2009
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I was interviewd by MMM yesterday on the budget and I have to say , although it wasn’t the horror budget we all expected, it may well end up being one. The reason why is because all the fiscal meaures the government has implemented are based on the fact that the Australian economy will be better next year. If it’s not, and so far there has been no indication it will get better ,then Australia will have no money left to help us and very high unemployment. So no job and no money left to fix the economy! That could be a bad sitaution to be in. But don’t worry, just make sure you have a safe job.
Fixed Rate Loans
Posted on May 2, 2009
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A Fixed Rate Loan refers to the fixing or securing of an interest rate at a set amount for a ‘set period of time’. The interest rate is contracted to remain unchanged during the term of the fixed rate, no matter what movements are occurring in the market place. Traditionally lenders have offered terms of between 1 – 5 years for fixed rates, however recently some Lending Institutions have offered terms of up to 10 years.
Fixed Rate term loans normally require the loan to be renegotiated at the conclusion of the Fixed Rate term, thus a 5 year fixed term loan would normally be required to be repaid in full at the end of year 5. However most Lending Institutions have the ability to arrange for the facility to revert to the Standard Variable Rate after the Fixed Rate term has expired. Thus a loan facility can be established for a 25 or 30 year loan term with the first 5 years, fixed at a specific interest rate. These types of facilities are popular within the first homebuyer market as they guarantee that the loan repayment will be the same for the Fixed Rate period.
Many property investors have also found the Fixed Rate loans attractive products due to the product offering the comfort of guaranteed repayments.
Borrowers who wish to utilise one of these facilities should be warned that they are committing to a contract with the lending institution, that they will continue the facility for the prescribed term. Should this contract be required to be broken or the term changed, the lending institution may require the borrower to cover its costs involved in the breaking of the contract. These are commonly known as ‘break costs’ and can be very expensive. The break costs are determined by many factors; such as the term remaining, the current interest rate environment and the amount of the outstanding balance.
In addition to the prohibitive cost is breaking the contract terms, many Lending Institutions will also restrict, how much can be repaid of the loan facility during the Fixed Rate term. This may vary from a few thousand per year to a percentage of the initial loan amount over the Fixed Rate term. These products offer guaranteed repayments for a period of time, but they also offer very little in flexibility. You should be made aware of these costs, prior to committing to any Fixed Rate product.
New Finance Video Blog
Posted on May 2, 2009
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