Who Has Locked in a Fixed Rate Mortage, and Come out Ahead?

schwinn on 12/11/2020 - 10:56

With never seen before lows for fixed interest rates, significantly lower to variable rates (comparing within the same lender), it's getting tempting to lock in a fixed rate for up to 2 years. Even more so with generous cashback deals from Westpac ($3K per mortgage).

However, I've always believed that the banks know better (than most of us), and the fixed rate is probably a forecast of where rates are going - locking ourselves into a fixed rate seems to be a 'trap' for us as they can foresee rates swinging to their favour in the long term.

Speaking to a few mortgage brokers I know, some have said people never win on fixed rates, whereas some say there's a small chance and people usually use it only for cashflow stability.

Bear in mind, 'coming out ahead' of the banks to me is defined as paying less interest across the lifespan of the fixed rate, compared to a variable rate mortgage of an equivalent term.

I'd like to know how many go for fixed rate mortgages, and if you've come out ahead before it would be great to hear the circumstances (what years, rate movements, etc). FYI I might not be responding much, as I'm just trying to survey the OzB community, and generate discussion.

Poll Options expired

  • 8
    I've beaten the banks on a fixed rate before
  • 35
    I've been fixed rates, turns out variables were better.
  • 3
    I've been on fixed rates, not sure if I came out ahead
  • 19
    I'm a fixed rate virgin
  • 9
    What's a mortgage?
Financial Home Loan Loan

Comments

  • Donaldhump on 12/11/2020 - 11:14

    about to fix @1.99% will use cash in share market instead.

    • jv on 12/11/2020 - 11:37
      +2

      Good luck…

      Interest rates going -ve before too long…

      • whooah1979 on 12/11/2020 - 12:33

        It'll take some time before interest rates drop to zero after the cash rate goes to negative.

    • Slippery Fish on 12/11/2020 - 14:02

      1.99 comparison rate?

  • onetwothreefour on 12/11/2020 - 11:20
    +1

    I fixed at 2.22% which I'm kind of regretting now, but my outstanding loan balance minus my offset account means I'm only paying interest on about $90k so not much chance to save a lot of money even if I was on a lower rate.

    • schwinn on 12/11/2020 - 11:41
      +1

      Thanks for the honesty. Do you mind if I asked how long ago you fixed it?

      • AustriaBargain on 12/11/2020 - 12:20
        -1

        Thanks for the honesty

        That's the most damning indictment I've ever seen.

        • schwinn on 12/11/2020 - 12:31
          +3

          Didn't mean it that way, I was just saying that because personal finances are always personal, and for some it takes a lot to speak honestly in a pubic forum

      • onetwothreefour on 12/11/2020 - 13:03
        +1

        I fixed for 3 years.

      • lolz112 on 12/11/2020 - 14:01
        +2

        Just to add another perspective. They probably fixed it when variable rates were higher so would have been saving on the variable rates up until now. Sure if they fixed it now they could get it lower but at 2.22% it is still beating most variable rates atm.

    • macrocephalic on 12/11/2020 - 11:55

      I'm pretty sure that my lender has left their rates uncompetitively high on my loan, but my offset is currently exceeding my loan, so I'm not paying any interest - so not a problem.

      • Given on 13/11/2020 - 08:22

        What's your plan with the mortgage credit you have available? What are you paying in fees..

  • DingoBilly on 12/11/2020 - 11:24
    +2

    Depends a bit on context.

    If you do a refinance for $4k it's hard to not come out ahead. Even if the rate goes down you'll still be ahead in most cases, unless the rate goes down multiple times.

    Otherwise it's not like the banks are omnipotent. If it was as simple as they are always right/never go fixed than it'd be an obvious choice to always go variable. But so far, 1 year into a 2-year fixed rate it's been great for me - easily saved me/made me many thousands of dollars through cashback and the rate being better than variable.

    • schwinn on 12/11/2020 - 11:34

      Thanks. Would you be willing to share what rate you've locked into, and at when, so it can go through the OzB pub test? I noticed at this point the 'I've beaten the banks on a fixed rate before' poll is still zero counts.

    • valleyrain on 12/11/2020 - 12:31

      ^ this. If you get a significant cashback and fix it for a short period less than 3 years, even with a few rate drops, you can still come out on top. If you were to still come out of it at a loss, you can refinance again with another big cashback that should offset that loss. It is not as black and white though.

      • supacheap on 13/11/2020 - 15:07

        The only issue with this is you're making the assumption that there won't be other 4k offers in a year's time whereby even if you were on variable you'd refinance and come out ahead of the fixed rate.

  • GG57 on 12/11/2020 - 11:33
    +1

    Banks generally look for a balanced investment book, and make their money on the interest differentials between their lending books and their borrowings (retail and wholesale). They may have a relatively small balance that they are hedging on, but they generally don't like high risks.

    If you choose to fix in a rate, just live with it. I can't see much value in always checking if you have "won" or not. Live life. It's like buying something; if you like the price for the product, do it and don't look back in a weeks time when it is on sale.

    • schwinn on 12/11/2020 - 11:35

      Fair comment.

      For me personally, if I'd gone into a fixed rate, I'd certainly like to know whether I came out on top, to decide the next time whether I would do it again. In this case, I'm trying to see if I should pop the cherry.

      • GG57 on 12/11/2020 - 11:47

        Past performance is not indicative of future results.
        Everything could change before the 'next time'.

    • scrambledeggs on 12/11/2020 - 13:53
      +2

      I wholeheartedly disagree with this advice, actively shopping around your mortgage can save tens of thousands of dollars over your lifetime.

      Would you trade 10 hours a year (for 20 years of a mortgage) researching rates & refinancing, in order to save $10k? That's the easiest $50/hour I'll ever make.

  • Drakesy on 12/11/2020 - 11:35
    +2

    At the moment with rates falling for the past 5+ years it would be hard to come out ahead on fixed. If there was a sudden uptick in interest rates then fixing would be sensible, however with the economy and house prices the way they are i don't feel that rates are going to be going up any time soon.

    However, knowing this negative interest rates aren't really a viable option (this was explored in Europe and didn't work) so i feel we'll be close to the bottom

  • netjock on 12/11/2020 - 11:36
    +2

    Interest rates are not going up. If you think about the number of people who have locked themselves in for 30 years P&I mortgages if the RBA raises rates 2% half of mortgage holders will go broke.

    Central banks are forever saying rates will go back up. Problem is everyone is locked into a big mortgage on property that doesn't make jobs, therefore why retail is bad which has knock on impact on manufacturers.

    • macrocephalic on 12/11/2020 - 11:59
      +1

      Rates could go back up if the government actually did something to bolster the economy rather than leaving it all on the shoulders of the RBA - and then cutting taxes as soon as the economy recovers slightly. Fiscal and monetary policy are supposed to smooth the peaks and troughs but they keep trying to build up the peaks and have nothing left in the troughs.

      • netjock on 12/11/2020 - 15:11
        +1

        Rates could go back up if the government actually did something to bolster the economy

        What they do is with tax payer money. Governments are slow at making laws that protect their citizens, don't expect them to have much foresight.

        rather than leaving it all on the shoulders of the RBA

        You almost got the problem. Government made RBA independent to stop political control (politicians are useless). Government policy is pretty bad and not working with the RBA and turning it into a political football rather than a partnership.

        Fiscal and monetary policy are supposed to smooth the peaks and troughs but they keep trying to build up the peaks and have nothing left in the troughs.

        RBA can change interest rates, intervene in the markets or do QE. If you think about your own personal budget you need to save when times are good and spend when times aren't and RBA can't do that. The government needs to do that but as we know politicians are useless.

        Example I always use:

        IF house prices were $100k less (by some parallel universe where they managed the bubble well). It assumes everyone needs $20k less as a deposit. If you spend the $20k on services (Yoga classes or whatever) and by magic it circulates in the economy for 260 days (52 weeks less the weekends) it is $5.2m or 52 jobs if everyone is on $100k.

        You put $20k as deposit on a house to borrow $80k. The bank makes 2.5% ($2k) maybe you make 10% appreciation which is $10k. Sure ain't providing 52 people a good $100k salary.

        More expensive houses get the worse the real economy gets.

        • whooah1979 on 12/11/2020 - 15:35

          Now explain the repo market ;)

          • netjock on 12/11/2020 - 15:42
            -1

            @whooah1979: Thought we agreed through DM you were going to explain the repo market!?!?

            Don't slack off mate.

  • tsunamisurfer on 12/11/2020 - 12:00

    Lending institutions spend a lot of resources forming complex calculations to gauge the future of rates and adjust their long term fixed rates accordingly.

    I would say due to the terms and conditions of the fixed term loan and the bank’s future projections of interest, the banks more often than not come out ahead, I have no problem with that.

    Fixed Term is a gamble, the customer can win, but it favours the House. Customers can make their own decisions whether they wish to play. One benefit of Fixed Term loans is seeing people ask on public forums what they can do to break Fixed Term contracts.

    Since the GFC I have only known fixed term deals to favour the bank, I had a colleague that fixed at 8%+ for 5 years in mid 2007 only to have the GFC plummet the rates from 9%.

    • netjock on 12/11/2020 - 15:24
      +1

      Lending institutions spend a lot of resources forming complex calculations to gauge the future of rates and adjust their long term fixed rates accordingly.

      You over estimate how smart our banks are. It is because RBA giving cheap rates

      From the article However, the banks' funding costs have been reduced, with the RBA also cutting the rate of the Term Funding Facility, which means banks can borrow from the RBA at a rate of 0.1 per cent for three years.

      Our banks (glorified building societies) have had it lucky for last 30 years as our RBA rates have been higher than rest of the world which means their margin on top is a good multiplier. Think of it as 0.1% + 2.8% = 3% vs years ago when it was 2% + 2.8% = 4.8% (notice interest calculated daily on margin on top of a good underlying rate gives you more absolute dollars).

      From now it is a matter of shrinking margins. Even if RBA go negative rates the banks can't charge interest on deposits. So at -0.5% + 2.8% = 2.3% unless RBA starts giving $1 and asks banks to pay back only $0.995.

  • minas01 on 12/11/2020 - 12:21

    Interesting read in this Reddit thread here: https://www.reddit.com/r/AusFinance/comments/jpdr7d/fixed_ra…
    Its made me contemplate fixing a portion of our mortgage. I tend to agree with what the person is saying. Fixed rates currently lower than variable rates. Even if variable rates continue to drop (and you're relying on banks passing the rate cut on), it will take 2-3 years potentially to reach current fixed rate levels. All that time you could be saving interest on your loan. for me currently sitting on fully variable at 2.59%, if I can fix 80% of our loan for somewhere around the 2.00% then i'll probably lock it in

    • participant123xyz on 12/11/2020 - 14:11

      This ^

      I had fixed about a decade ago and came out ahead.

      Now a month ago I fixed half my mortgage as I refinanced, which I'm a little bit annoyed about seeing as Fixed rates dropped.

      But these are weird times - the initial question of whether I'm better off fixed vs variable. My fixed rate is 2.2% and variable is 2.6% (ish). So, for the variable to catch up the banks needs to pass on 40bps of rate drop before I even 'break even'. Then if variable rates go below that, it will still be a while to go before I would have been better off being all variable due to the interest savings over time of the fixed portion of the loan.

  • Cluster on 12/11/2020 - 13:08
    +1

    This reminds me of a coworker in late 2008 who listened to the doomer articles on News Limited of the time (double digit interest rates coming! $2/L petrol coming!) and decided to lock in her mortgage at 9.3%… and then rates started to tumble. I kept mine floating and have enjoyed non stop cuts that beat all fixed rates for a decade. I don't think that trend will change any time soon. RBA is keeping rates extremely low for 3 years, and the only thing that would force rates up is a currency crisis in Australia.

    • netjock on 12/11/2020 - 15:27

      But there is a currency crisis. Australia dollar too strong because RBA rates were higher than most of the developed world. They've had to devalue it to avoid killing local industry / exports. It is a race to devalue to remain competitive. Drop interest rates and dollar drops.

      Because money is not pegged to anything (used to be gold), it is now just relative to other currencies if one devalues then the others have to devalue to stay competitive.

  • El-Rhi on 12/11/2020 - 13:17
    +1

    It’s a great time to fix if you don’t plan on refinancing/selling within the fixed rate period, aren’t intending to make more than $10k additional repayments per year and don’t have a large offset balance.

    Essentially, the RBA has a number of policies (TFF, bond buying etc.) which is keeping the cost of fixed lending lower for the banks, who are then passing these savings onto customers through lower fixed rates. Just because fixed is lower than variable, it does not mean banks think interest rates will go down further, it just means they can access cheaper fixed funding.

  • scrambledeggs on 12/11/2020 - 13:58

    As others have said there is a small chance fixing your rate will leave you in the black compared to remaining on a variable rate, however I don't fix my rate because you can't make additional repayments on a fixed-rate loan.

    With interest rates so low, the additional repayments I make each month (still paying the minimum based on 4% interest rates when the loan was established) I come out way ahead compared to making the fixed repayment on a fixed rate loan. Something to consider.

    • netjock on 12/11/2020 - 15:29

      If 1 year fixed rate is lower than variable do that. Because the worse thing that can happen is you are a sucker for 12 months. If 12 months fixed is 0.5% lower than variable then do we believe RBA will take another 0.5% off to go to -0.4%?

    • Extreme on 13/11/2020 - 09:44

      Most fixed rate loans do allow you to make additional repayments. But they are usually limited.

      I know St George allow $30k over the fixed term, wethers its 1 or 4 years.

      Others allow $10k/year.

      And let’s not forget you can split your loan into fixed/variable portions too. So you can a smaller variable portion to make those extra payments on too.

  • crashloaded on 12/11/2020 - 17:35

    I fixed at 2.29 for 1 year in May.

  • Sweet3st on 12/11/2020 - 19:13
    +1

    I’m thinking of fixing for 4 years at 1.99%. I’ve never fixed in the past because of thinking the banks always win, but 2% is pretty low already, I can’t see it going much lower and as people have pointed out, variable quite a bit higher if you want to stick to big 4. But yes I have no plans to sell and $10,000 extra a year is about my limit.

  • miwahni on 12/11/2020 - 22:23
    +2

    The worst reason in the world to fix your rate is to "come out ahead". The only reason to fix is to ensure stability of cash flow ie for a set number of years you know your repayment is going to be $xxxx and you can budget accordingly. Variable may rise, it may fall… but your budget is unaffected.

    If there's a chance that you'll feel angry or hard-done-by if you fix and then variable rates drop, don't consider it. You could be buying a world of self-inflicted hurt. But if there's a change to your circumstances coming up - say a married couple dropping to a single wage for a while when a baby is coming along, or planning a study break or similar, fixing can be helpful.

    When I was on a really tight budget for a while, I used to fix my loan for three years at a time just for the certainty. I kept a small portion variable so I could make extra repayments with things like tax refunds etc. The last time I fixed for three years my rate was 6.49% (we're talking mid-2000s) and when it came off fixed, the variable was just over 9%. Fixed rates were also quite high. I decided to fix again, but only for one year, hoping that rates would drop. So I fixed for 8.5% for one year. During that year the GFC hit and the variable rate tumbled. By the time the fixed year was up, variable rates were down around 6% again.

    For most of that year, I was paying a higher rate than the variable but at least I didn't have to worry about repayments going up and my loan being potentially unaffordable. And THAT is the reason why you would contemplate fixing.

    • schwinn on 12/11/2020 - 23:23

      Good advice, thank you for that perspective.

  • braskic on 13/11/2020 - 07:20

    I fixed back in 2017 just before APRA started pressuring the banks to hike investment home loans. Given the variables on the loan at the time I feel I came out ahead versus if I did nothing.

  • Ashbargin on 13/11/2020 - 08:39

    I haven’t read all the replies. The reason why the 2,3 and 4 rates are so low is because the RBA is Specifically buying bonds in this area. The RBA is trying to keep these rates low to encourage longer term borrowing.

    So it not about beating the banks it is about take the incentive the reserve bank is providing.

  • Extreme on 13/11/2020 - 08:55

    How are people determining wether they are in front or behind?

    Are they looking purely at the rate they are paying at the end of the fixed period, or calculating the differences across the fixed period?

    Currently I’m 6 months into a fixed investment loan(interest only) paying 2.69%. The current variable rate with the same lender is higher. We were paying 3.33% with our previous lender before we refinanced.

    With interest rates looking unlikely to move in December and the next rba meeting not until February, I think it’s looking likely we’ll win with going fixed in this instance.

  • Waltervp on 13/11/2020 - 09:10
    +3

    In the recession 'we had to have' i lost my home because I had no idea how long the high interest rates would last, but knew I couldn't afford another month of 20%! I was talked into a variable mortgage as interest had never been as high as 12% and would surely not go any higher…. so now i fix my mortgage. Not because I want to beat the bank, not because I want to save, I just want to have a figure I know I can afford.

    Just make sure your situation is not going to change, like not wanting to sell house or pay off large chucks of mortgage. I fixed for 5 years recently because I like knowing that I pay a very affordable amount each month to have a roof over my head and no surprises and no stress. I'm on a disability pension and don't want any surprises, and I don't have to worry about banks giving me best rates!

    Like when my fixed period was about to finish westpac didn't want to even start the prices for fixing again till almost the last day. This meant I was on variable for about 3 months or so (I'm sure they delay everything) and they charged a VERY UNCOMPETITIVE variable rate. So uncompetitive i had to call and complain and whilst waiting for the fixed rate paperwork they had to lower my variable interest rate… westpac is money hungry.

    And worse, I pay a yearly fee which includes a premium credit card fee but they won't give it to me as I don't earn enough in their books!! Even if I stop my anz platinum card with 25k credit they still wouldnt consider giving me a premium card. In other words why do I pay their stupid annual fee to get benefits i can't use? A quarter percent mortgage discount doesn't even warrant it in my case. …. banks…. they don't care who you are they just squeeze you at any opportunity, so I like my mortgage fixed for 5 years.

  • Rafski on 13/11/2020 - 10:54
    +1

    I fixed my loan at 2.14% with UBank. They have now dropped their fixed rate to 1.95%, so I would have been about $500 per year better off if I fixed now. However I'm still ahead compared to the variable rate.

  • smashman42 on 13/11/2020 - 17:10

    I split my loan when the fixed rate dropped to 2.19% in April with the rest of the loan still on variable 3.72% atm, so thus far I'm shitloads ahead of the status quo ($55k fixed, ~$30k variable)

    With such a tiny loan no-one gives any of the good rates, they literally don't give a shit about loans under $150k and don't fight for them and offer rates full percentage points higher than what they advertise for everyone else with bigger loans.

    So back in April with the costs of refinancing being about $1k factored in, refinancing needed a similar rate to the then fixed rate to have been worth it vs the 2yr fixed split option, which has now happened for bigger balance loans but I haven't checked refinancing variable for the tiny loans lately but I doubt they'd want my small change and offer anything near the 2.2ish.

    I didn't have a crystal ball and at the time this option saved me more and is still saving me more than if I stayed on variable, and the fixed rate for my loan balance has only dropped to 2.09% if I waited until now, so I'm happy enough where I am & figure the economy will still be shit when it unlocks to let me try split fixing again or maybe refinance if things really do get even worse.

Login or Join to leave a comment
Login Join