I am so confused whether to fix the interest for OO property for 3 years @ 1.75% as covid situation is still evolving and not sure how it will effect interest rates in future and is that a smart move or not? Any ideas or suggestions from fellow Oz bargainers would be appreciated, thanks
Update-
Loan -560k
Owing- 500k
Current variable rate 2.34%
Thinking of fixing @ 1.75%
Negative interest is also a concern but the question is when that will come in Australia.
Thanks in advance everyone đź‘Ť
Idea of Fixing Home Loan Interest Rate @1.75% for a Period of 3 Years
Liamhunter on 14/02/2021 - 00:40
Last edited 15/02/2021 - 01:07
Last edited 15/02/2021 - 01:07
Comments
if banks are advertising fixed rates, its because they think rates will go down more, and banks probably pay people a good sum to figure that out.
That's not strictly correct. The RBA is offering below market rates for fixed term lending to banks as part of their quantitative easing program.
Yes, RBA is literally offering 0.1% for 3 years. They are buying up all the government bonds with life (duration) of 3 years to run to push rates down.
If the Banks are advertising that rate (to approved applicants) they are matching that against offering Deposits or funds they are sourcing from elsewhere.
Look at:
https://rba.gov.au/statistics/interest-rates/
(Remember "the trend is your friend")*
*“The trend is your friend, until the end when it bends.” lolThat said, that the Banks are advertising isn't sinister as such. They are a Business and make their margin (or not) based on Lending and Borrowing.
Re:
'… Rate @1.75%'
Make sure you ask/determine what the 'comparison rate' that specific offer of theirs equates to is. If you ask them that (or, incidentally, if they advertise this '1.75%' rate), they are legally obliged to tell you. If the actual comparison rate was anything under 2.00%, I would encourage you to jump on the offer. I bet though, that the comparison rate is substantially above 2%. The comparison rate factors in additional factors beyond the actual interest rate charged on the amount owing each month; such as up-front fees, annual 'loan charges', additional/early repayment charges, etc..
Comparison rate not very helpful unless your loan is exactly the same as the comparison rate loan (amount borrow etc) .
he comparison rate is really pretty useless as it is more helpful to know the overall true cost of the loan. It is based on a loan of just $150.000 and who in todays age only borrows that amount. The stated "comparison rate" on a $150.000 loan would be much lower on a loan of say $500..000
Re:
Comparison rate not very helpful unless your loan is exactly the same as the comparison rate loan (amount borrow etc.).
I disagree. One of the main purposes of the comparison rate is precisely so that consumers have at least some sort of benchmark against which they can compare all homeloans. Note that whenever banks offer an incredibly low rate that sounds a bit too good to be true, it is inevitably accompanied by a 'comparison rate' (which they are now required by law to state, along with the rate they are offering) that is substantially higher than their stated rate. This means that the loan they are offering includes extra charges and fees that are not incorporated into the actual base rate they are offering. Thus, knowing the 'comparison rate' is not, in my humble opinion 'pretty much useless'; in fact it's often very telling.
'The comparison rate is really pretty useless as it is more helpful to know the overall true cost of the loan.'
I disagree. In fact another of the main purposes of the comparison rate is exactly that; i.e. it is so that consumers have at least some indication of 'the overall true cost of the loan', rather than just the monthly interest rate that will be charged on the amount borrowed. Notably, in almost all cases the 'overall true cost of the loan' can also only be calculated retrospectively; because it depends substantially on a number of variable outcomes that can occur/fluctuate throughout the (usually very long) time that it takes to pay off a homeloan. Things such as extra repayments being made, payments being missed, the loan being 'paused', interest rates, etc.
@GnarlyKnuckles: It is important to understand how a comparison rate is calculated … and based on that calculation why it's somewhat misleading in respect of fixed rate offers.
A home loan comparison rate is based on a range of factors, including those already mentioned, but most importantly for this conversation is based on the cost over a 25 year loan that assumes that after the fixed rate period, the loan reverts to current standard variable rates and continues that way for 25 years. Those standard variable rates are currently in the ballpark of 4.5% (note, few people pay the standard variable rate, but nonetheless that's how the calculation works).
The problem with the calculation is then twofold … (1) it assumes the borrower cannot take advantage of another fixed rate term at the end of the loan that may be cheaper than the standard variable rate, and/or (2) that the borrower will not be able to access discounts to the standard variable rate (which most borrowers can). Many will also totally refinance somewhere along the way. Obviously no one can tell what interest rates will do in the future, but on an "all else being equal basis" these issues exist.
What becomes confusing for the borrower then, is that they see 1.75% p.a fixed for three years with a comparison rate probably ~3% and can think there's some mystery sting during the fixed rate period. While many loans will comes with an annual fee of ~$400 (that adds to the effective rate), that's not what causes this difference (even at the base $150k, this would only add 0.27%).
The comparison rate is a fairly irrelevant data point for most home borrowers as it assumes a lot of things that are simply not relevant for the typical borrower.
@Seraphin7: Re:
'The comparison rate is a fairly irrelevant data point for most home borrowers as it assumes a lot of things that are simply not relevant for the typical borrower.'
Frankly/respectfully, a contend that that is utter BS and that your 'rationale' as to why you believe it to be so is similarly … erm … erroneous. There are multiple good reasons why banks/lenders are required by law to state the comparison rate whenever they state the rate that they are offering on one specific 'deal'/homeloan. They would simply not be required to do this if your contention that 'The comparison rate is a fairly irrelevant data-point for most home borrowers' was even close to correct.
@GnarlyKnuckles: The majority of legislation in this area is well meaning but flawed. There's no way you can create a single number to compare offerings that works for multiple people's circumstances. 100k loan for 30 years? Make sure you have the lowest recurring fees and charges. 1.2 million loan for 10 years? Screw the fees and charges, a fraction of a percentage on the interest rate will outweigh all of those in savings.
Comparison rates are for the financially illiterate. If you think they are an accurate figure of the cost of a loan that should be trusted rather than taking into account your individual circumstances, I guess you fall into that group.
@norrisrules: Hmm … it seems that you have missed the point of my posts (and perhaps the point of 'comparison rates') entirely. Comparison rates are not 'for the financially illiterate'. Among other functions they successfully fulfill, they are designed to ensure that lenders cannot simply/'loudly spruke' loans at a relatively low interest rate, but then subsequently/quietly 'sting' the borrower with huge fees/charges/inflexibility/etc. in the 'fine print'.
Frankly/respectfully, a contend that that is utter BS and that your 'rationale' as to why you believe it to be so is similarly … erm … erroneous. There are multiple good reasons why banks/lenders are required by law to state the comparison rate whenever they state the rate that they are offering on one specific 'deal'/homeloan.
Respectfully, what are they and how do they assist a potential borrower who is attempting to do something quite different from the basis of the comparison?
They would simply not be required to do this if your contention that 'The comparison rate is a fairly irrelevant data-point for most home borrowers' was even close to correct.
Respectfully, suggesting that government regulation, particularly when it attempts to distill any number of variables into a single number, always creates a simple outcome for consumers is somewhere between simply naĂŻve and plain wrong.
The comparison rate formula is/was designed to prevent the layering up of various charges, fees, levies, etc. that makes the headline rate low, but can end up costing the borrower much more. It was simply not designed to cater for scenarios such as fixed rate loans that revert to an effectively imaginary rate that the borrower is unlikely to pay.
Comparison rates are VERY misleading. They are not helpful in 90% + of cases…in most instances they steer you in the wrong direction.
Hmm … A post simply pointing out a couple of basic facts about 'comparison rates' as they apply to homeloans in Australia in direct response to the OP's question is 'negged out of visibility'. Odd.
It's because you were wrong about points, and adamant about it.
There are numerous descriptions of the 'comparison rate' espoused by various companies/groups on the net, but they all pretty much equate to this:
'What is a home loan comparison rate?
A comparison rate is designed to represent a closer estimate of the total cost of a loan per year. It is expressed as an annual percentage rate and includes the loan’s interest rate as well as most upfront and ongoing fees and charges. Lenders are legally required to show customers a comparison rate alongside a product’s interest rate.'https://www.canstar.com.au/home-loans/comparison-rates-expla…
So … erm … which points were I wrong about?
This is not financial advice but how much lower do you think rates will go? If not much lower maybe it's a good time to fix at least a portion of your home loan.
This is not financial advice but how much lower do you think rates will go?
Some people are betting the banks will pay us! $2m property we will only pay $1m over 30 year mortgage. But then is it still worth 2m?
People should look at ECB negative rates, Sweden, Denmark and Japan. Central bank rates might go negative but mortgage rates won't.
Central bank will charge commercial banks money to deposit money with them. It doesn't mean what you would have 1.99% at 0.1% RBA rates will go to say 1.99% - 0.5% = 1.49%. If commercial bank holds it then have 0 return, they can still lend it out at 2%.
At the moment it is taking 2 - 3 months to get pre approvals for loans. People are falling over themselves to borrow money. Inner Melbourne inspections pre lock down was like a night club queues
The only reason to fix 100% of your home loan rate is if you need to lock in what the repayment will be for budgeting reasons (e.g. investment property)
If you are doing it for any other reason then you are essentially trying to predict the market.
Sure, interest rates could go up and you might have a win if you have fixed at a lower rate. On the other hand the RBA could cut the official rate further, going into negative territory such as has happened in many other countries, and you could be stuck at a high rate.
In 2008, just before the GFC hit, I fixed my rate at 8% for 3 years. Family, friends and broker all recommended it as it seemed like interest rates were going to continue rising and my wife and I wanted to start a family and therefore wanted surety of payments. Then the RBA cut rates to 5% and I was stuck at 8 for another 2.5 years. Break costs quoted at $40k to get out of the fixed rate. It still stings today to think of how much money I would have saved if I hadn’t fixed.
Lesson learnt: don’t try to predict the market. I will never fix again.
If you want to make a bet that rates will rise, then fix 50% of your loan so you have a bet either way.
Disclaimer: this is not financial advice
I will never fix again
You shouldn't just blindly say things without understanding the circumstances, which are very different now to when you suffered your break cost. He's talking about fixing at 1.75%. Even if the variable drops to 0%, which they won't, it's no where a 3% drop (from 8% to 5% in your case).
Imagine fixing at 1.75% in 2021.
I fixed mine at 2.22% about 6 months ago, kicking myself a bit now but luckily I don't pay a lot in interest every month so wouldn't make a huge difference anyway.
1.75% is an incredible deal. If you were offered this rate just 12-months ago, you would have been on it like hoes on Santa. If it were offered 3 years ago, it would have been the deal of a lifetime. You can’t go wrong at this rate - It’s not much more than inflation. Don’t let FOMO affect you.
At 1.75%, even I would be all over Santa. No homo. Or FOMO.
Ok so everybody says fix half, variable half. Offset etc.
My philosophy (this is poor advice but its my opinion) is that I fixed at 2% for 3 years. Limited to 10k extra repayments.
The extra I would pay I put aside for 3 years in another account (an extra $150 a week) and in 3 years I will put the lump sum on my loan. Fix again for 3 years just before the increased rate. Rinse and repeat. It has its flaws but I have crunched the numbers for hours and in my eyes is a damn good strategy.
OP we probably need to know what fees you pay for 1.75%. But might as well split your loan and lock in whatever you feel like you won't pay off in the next 3 years.
Assuming you can afford to pay extra on your loan, I would split it. Lock in a large chunk and then pay extra on the variable part.
That said, even if the rate continues to drop, how much would you potentially save at 1.5% or 1.25%? I don't imagine it's a huge amount compared to if it swings the other way and you don't lock it in until say 2.5-3% or higher.
If you provide the forum with your current balance, your current rate, the fees involve to change the loan, the rate it reverts to after 3 years, I'm sure a number of people will able to assist calculating if house much better/worse off. You then find out at which point it is break even point if the variable interest rate has dropped. e.g. -10bp at year 1, -15bp at year 2 etc.
Otherwise the general opinion here won't really help you decide if it is a smart move. It will be base on assumed figures and believes.
Hi OP, with your update
Owing- 500k
Current variable rate 2.34%
Thinking of fixing @ 1.75%Assume you are already with the same bank (e.g. ubank), you don't need to pay the title change fees (yay!) and that after the 3 years it will revert back to same variable rates. Then over the next 3 years, it looks like you will save over 8k net if keeping it as a P&I loan with same term (say 25 years or more). This looks like it will dwarf that fixed rate fees of $400. Unless you are bringing your loan from a different bank, or you have shorter terms, fixing with the same bank now sounds smart to me. (Not financial advice)
Negative interest is also a concern but the question is when that will come in Australia.
No crystal ball with me, but I think we would be lucky if PPOR fixed interest rate drops below 1.00%. if you want to wait for a further rate drops before fixing, then remember every month you delay, you are paying extra $250 on interest.
While there is a chance the variable rates drop below 2.34%… if that happens in next 3 years, you'll just have saved less.
Good luck with your decision
@NeutralName -Thanks yes it’s with U bank same bank and not changing bank!
I would personally fix at 1.75% if there is certainty of income. RBA rates are already at 0.1%. The currently the difference between discount variable rates and fixed rates are about 1 percent. Banks have not been passing on full rate cuts. There isn't enough room to cut the fixed rates further. The reason banks are offering lower fixed rates, because they want to hang onto quality loan books to tide over uncertain times. Their cost of funding is low now, so they can offer to provide lower rates and cash incentives to grow their loan books during uncertain times. They are not passing on much of these discount prices to their existing customers, which is another indicator they are looking to grow their business to tide over low sale volumes. However, this might change soon as most predictions are now indicating growth in property prices right across the board, and faster recovery of unemployment rates. If I could do it, I would fix at that price now.
Personally I have been thinking of this too as this is the lowest I have ever seen on a home loan. But I cannot find any banks that don’t charge a $375 package fee for fixed home loan, so for me it’s just not worth fixing. Also to get 1.75% I would need to refinance and that costs another $700 or so in fees. It really depends on how much you are fixing and who you want to fix with and if you get cash back if you refinance.
A few banks charge $120 a year in fees so its only about $250 a year for the package. As the package fee will usually have no monthly fees. And if you are saving 0.25% or more than its beneficial.
Think first about what the lender is offering you…a big advantage is having an offset…if they don't I wouldn't touch them.
You can park your excess funds in the offset and save a bunch on interest (depending on how much you can put in) and have the flexibilitiy of pulling the funds out any time you want.
Many banks that don't offer offset accounts let you redraw which is effectively the same
Re:
'Many banks that don't offer offset accounts let you redraw which is effectively the same'
Erm … WTF? This makes absolutely no sense whatsoever. Can you please explain why you think these two completely different things (an offset account into which you can deposit extra money to reduce the interest you are charged each month, and a redraw option which essentially does the exact opposite of that if you do redraw from it) are 'effectively the same'?!?
Chill out dude. An amount in redraw also reduces the principle and subsequently interest paid, just like an offset. They are not the same product and the limitations on redraw do not compare with offset, but the outcome in terms of saving interest is effectively the same.
A redraw ability vs an offset is effectively the same thing. Yoyo explained it wrong but basically the difference is offset you get a bank card, and the funds are instantly withdrawn. A redraw might take one business day and you don't get a bank card with it. But yes, they can effectively work in the same way…
I was quite shocked when I figured this out. Maybe an offset has other perks but I'm yet to find them…I was quite shocked when I figured this out. Maybe an offset has other perks but I'm yet to find them…
Helps with tax deductibility of the mortgage when convert into an IP.
Also helps with direct debit
The other 'perk' is that you control the amount in the offset. With a redraw, the amount goes down as the loan goes down.
I know ef all about this sort of stuff so feel free to ignore. But I see banks advertising fixed rates all the time, and I think I read (maybe here?) that if banks are advertising fixed rates, its because they think rates will go down more, and banks probably pay people a good sum to figure that out.
In saying that, if it works for you then its great, you know for the next 3 years what budget to stick to and whats safe for you. I could be wrong, but I can't see it swinging that huge that you're looking at -5% or something.
My guess based on absolutely nothing is that rates will probably stay low for the next 3 ish years. So I would be a little careful that when you finish up, you may be refinancing in a more difficult time then i would imagine a 1 year or 2 year period.