First of all, I am aware that there is a 99.9% chance that this is a very stupid question.
But I'm going to ask it anyway..
With lots of talk of raising interest rates soon and so many people will be defaulting on their homes because of it, why aren't they already in a fixed loan? What are these nervous easily broken people holding out for? More good times? Should I have waited? What am I potentially missing out on here that I should of risked it all waiting for?
And many have fixed loans already.
So OP is late to the party
Fixed rates jumping up by 0.75% right now.
I wish i had known about this before i fixed my loan last year for 2 years . After i fixed it, some of my friends told me about this which i would have much preferred.
Sometimes it is a good idea to do some research.
Strange, every loan I’ve seen recently allows you to pay about $20k extra over the fixed term, with free redraw. Who’s your bank?
Westpac, Yes I was able to deposit up to 30k into it , but I did that quite quickly and then i basically keep the rest of my income in a ING saver accoutn for interest. and have to transfer back and forth for home loan payments etc but still try to get some interest from the income. While if i had a variable / offset account which i used to have then it was a lot easier.
I went through a Mortgage broker initially and he couldnt beat what my bank could offer me. But neither told me about the benefits of having a mix of both types of loans.
@lonewolf: Next time you fix you can split into multiple 30k fixed rates which allows you to pay more then 30k in advance across entire loan. I have 4 separate fixed rates and remaining balance variable. Am with westpac also
@lonewolf: I've got similar setup with St George and don't see the point in extra repayments at current interest rates beyond the 30k (emergency fund).
I personally get better returns in salary sacrifice to super and investment into shares but I have no dependants so I'm more able to take on risk.
Maybe a lot of people don't have home loans - therefore, nothing to fix?
Not necessarily true. Very few providers allow offset with a fixed loan. Reduce loans have a product as do ANZ
Not strictly true. I have been with CBA and macquarie bank and both allowed about 10000 AUD/year extra on top of the actual amount.
Can pay more if you want I believe the fee would be zero as rate has gone up
Why would you want to withdraw money from your home loan? Wouldn't that increase your interest?
You can have your salary deposited into the home loan and withdraw money as you need to spend it (or use a credit card and pay it off each month), then you have as much money in your home loan as possible at all times.
Does an offset account achieve the same thing?
@Nereosis: I think that's what I meant… I know there is "offset" and "redraw" which are different things, but not sure what the difference is
Wouldn't that increase your interest?
The fiat 💵 in the mortgage is debased at a higher rate than the interest rate.
People who spend it get the most out of its value at the same time as the asset value appreciates.
Plenty of banks with fixed rates and offset accounts…
Anyone who is not paying off their loan as fast as they can is mad. On a fixed rate loan, you have a limit on the amount of extra repayments you can make per year. This means you will be paying off the loan for longer, incurring more interest. By the time your fixed 3 years is up, interest rates will have risen, and your mortgage will still be very large, which means you will suddenly be paying a lot of interest. It depends on the size of your mortgage, but for smaller mortgages it makes sense to get a variable rate and pay it off as fast as you can. If you have a mortgage larger than $700k, in my opinion, you're stuffed either way. You will be paying it off for decades, and you will eventually pay hundreds of thousands of dollars in interest. But it was your decision.
You're unlikely to be able to pay off your loan in three years, so part fixed part variable is the best of both worlds. You can make extra repayments into the variable part (and withdraw the extra if you have an emergency).
My loan will be paid off this year on a variable rate. Granted, it was a very small loan on a very cheap property. But I prefer to own a cheap property quickly instead of being a debt slave for decades. Something is better than nothing. Peace of mind is better than years of anxiety, regardless of the end result. Maybe people who bought expensive mansions will end up wealthier than me. But I will enjoy my years of debt-free fluid lifestyle.
@ForkSnorter: You could enjoy the same years of debt free lifestyle, but plus extra money to spend when you sell the more expensive property 🤔
I guess it's like choosing safer investments, you could buy risky stocks and make more money or just count on dividends from safe bank stocks, it's a valid strategy if you prefer the safe option and don't mind having less money at the end
Anyone who is not paying off their loan as fast as they can is mad.
A mortgage is around +4.00%. That is cheap money.
Borrowing cheap fiat money against the hard assets to buy more hard assets is financially justified.
Only really justified when asset price growth is higher than the interest rate. That has been the case over the past few years, but may not be the case going forward. Prices have already stopped growing in most areas, and interest rates are about to rise.
@ForkSnorter: The cash rate isn't going to increase in any meaningful way. It'll go up just enough to wet the weak hands so that they drop their portfolio and hide.
People are too fixated on what may happen and not paying enough attention to all the cheap assets that are getting damped by scared money.
If people are defaulting now, when there hasn't been an interest rate hike, then there are other reasons at play.
Nobody is defaulting now
And many borrowers have been assessed with a 2.75% to 3% buffer for the last 3 years as per APRA stipulations on banks in preparation for interest rate increases that were always going to happen.
So variable mortgage interest rates would need to rise by at least 3% to cause any problems with borrowers (supposedly)
Problem is inflation has likely taken a big chunk out of disposable income.
Inflation will also deal with the cost of the loan over time if you can hold down a job.
@Grazz989: What I meant is, the loan itself isn’t directly affected by inflation. (Hopefully wages at least stay close to inflation)
@WhyAmICommenting: Yep - but if the loan is not affected by inflation, and your wage doesn't get adjusted for inflation …. But all your expenses go up due to inflation … You're going backwards in a bad way.
On top of that is the proportion of liar loans…
Yes, they said that last time.
Not really it's pretty much fool proof. Raise interest = Raise Rent. Worst case scenario sell the property at cost considering how much prices has risen in the past 10 years. You still won't lose anything.
variable is like 2-2.5%, fixed is going to be like 4-5%
Yep, looking at home loans right now and variable is 1.99% while 3 year fixed is 3.99% from day one.
I would prefer to take on the risk instead of paying more upfront now. To each their own.
I would be stunned if there are 8 rate rises in the next 3 years.
Even if there were, you would still be behind because they won’t happen all at once.
no doubt its gonna happen, and they'll come in quick succession after the election
@Jason Genova: 8 rises will double the mortgage rate many are paying.
I'm deeply skeptical.
There is no reason to flatten the economy, wage growth is stalled, and exporters would welcome a lower dollar.
I reckon 4 rises, 2 this year and 2 start of next year much more likely.
@spiff: Good to see you on the path to more correctness ;-)
I actually feel weird about this, as I’ve spent the last 15 years getting out of debt, and my remaining mortgage isn’t material if it goes to 5% or more.
But I’m friends with lots of young people who would find interest rates doubling a massive problem.
So I kind of want to be rewarded for my caution and risk aversion, but I guess I’m happy to be the example dumb person who could have leveraged up for fatter returns if it means my friends don’t get stung in a way that would really hurt.
@mskeggs: Lots of people living a lie. They can only survive while rates are low and no shocks.
When COVID hit a lot of people went to the wall. Then the banks went to the government no doubt and told the government that can take some but not a massive hit (like everyone trying to sell their houses). JobKeeper only saved those with some savings not if you got a $1m mortgage and no savings.
@mskeggs: I’ve had a rough real bad run with work stability and I hate my mortgage… doing everything to smash it. But apparently I’m an idiot. “Mate, money is CHEAP right now!”. Some have said best money right now is to send maximum to superannuation, “if you can afford to”.
@mskeggs: I saw it somewhere, the bond yield curve is around 3% right now, I DEFINITELY SEE the mortgage rate at around 3-4% in the next 18 months. You have to remember the reason the rate is so low right now because the RBA gave commercial banks around 600B loan at 0.1% & 0.25% and these loans due in 2023 or 2024 that's why when covid started you saw so many deals on fixed term loan from 1-4 years because banks KNEW they would this rate for fix amount of time. After this period, they would have to refinance 600B to wholesale debt market. And remember RBA doesn't have to raise 0.25% at a time, the reason he cut 0.25% because they have limited amount of rate to cut, but infinite amount to raise.
You can bookmark this comment and revisit it in 12-18 months
@BluebirdV: I think RBA (cash) rate will be around 1 - 1.5% so i think the maximiser rate will be around 1% higher than the current rate. Sorry, i dont follow ING rate so much.
@mskeggs: Low dollar also means all imports cost more and add to inflationary pressure.
Australia imports a lot of goods as a result of a lot of manufacturing moving offshore.
some of the banks are predicting more than 8 rises by end of next year.
@WhyAmICommenting: I guess it must be touching sore spot for many to be negged for simply stating what all 4 of the big banks are currently expecting.
@gromit: Not necessarily 8 rises, but each rise doesnt need to be 0.25%. People seem to think each rise/cut is limited to 0.25%. if tomorrow the reported inflation was 15%, RBA for sure won't limit their choice of increase to only 0.25%
if tomorrow the reported inflation was 15%,
The CPI is +3.00% but inflation is already 2x or 3x YoY on things that people need.
RBA for sure won't limit their choice of increase to only 0.25%
The central banks won't nuke the economy even with a 15.00% CPI. They'll go a 0.50% hike at the most.
@od810: Well to be fair several are expecting 9-10 rises. each up to 0.25%. the RBA won't go for very large jumps as it is too much of an instant shock to the economy.
@gromit: I don't know the expectation in number of times they will increase rate, but historically they had 1% and 0.75% increases and decreases (in 1994 and 2008). It all depends on the market condition, it could be rare but nothing is impossible.
@od810: Those were when interest rates were much much higher so as a percentage of change the shock was less, the last one in 2008 was also seen as a correction for the previous rise that probably should not have happened. So yes not impossible, but unlikely.
10 year Australian govt bond yields have doubled in last 6 months to almost 3% as an indication of things to come.
And actual inflation running closer to 10-15%
Interest rates and bond yields have a lot of catching up!
Batten down the hatches
Inflation also means incomes gets adjusted (although delayed). I doubt much will happen as things get offset.
Bond rates are a predictor of where interest rates might go, doesn't mean they go there.
Also for those that will have cash to spare, better to stay variable and use offset to reduce the monthly interest accruing even further!
I was lucky to shift to 4-years fixed at 1.99% last year, also split the loan to leave about a 30% portion of it variable too for this reason and that gives us room to grow savings for the next 3 years leading up to when the fixed term ends.
Plenty of loans that are now fixed rate with full offset….
I consider myself extremely blessed I got a 3 year fixed loan of 1.69% with full offset, at the end of last year
So take the fixed?
We remortgaged on a fixed rate in February and the best rate we were offered was 2.28%.
In my limited experience with fixed, the house always wins. E.g. if they are offering 2.28… chances are the variable will be below that. I'm assuming that is for 12 or 24 months?
I stick with variable now, it means you aren't trapped when your bank should you need to sell or consolidate debt or sell the property.
I'd love to hear if there are any success stories with getting better value from fixed rates. Typically I hear that they are more for consistent payments than cost savings.
Just my 2 cents.
The simplistic answer is that banks have already factored in the expected rate rises over the life of a fixed loan into the fixed rate. So fixing on the way up is good if rate increases end up being higher/faster than expected.
This is the correct answer
Yep, fixing your loan is essentially betting against the bank, that the fixed rate will be better than the variable at some point.
Many years ago I chose 100% fixed rate for a 5 year period. While I bet correctly and locked in a better rate than variable, I wasn't able to repay more than $10k/yr to the principal. In hindsight, should have done something like 80% fixed to allow for extra repayments.
Yes, I fixed 90% of my UBank loan in early 2021. Has worked out well for me.
That's because back then banks were able to secure cheap (almost free) 3-year funding through the RBA's 'term funding facility', which was subsequently closed by the RBA in mid-2021. Their goal was to stimulate lending/growth due to COVID so they offered cheap money to banks, who passed this on as cheap fixed-rate loans to customers.
I don't think you are "…betting against the bank…".
Banks cover their lending books to minimise the interest rate movement risks.
Yeah betting against the market rather than betting against the bank…but kinda same same from the borrower's perspective.
This.
The only way I would ever fix a loan is when they were as close to 0% that I could think they could ever get, so even if variable was lower, it's worth the gamble that they won't stay lower.
I figure that the banks know better than I do which way rates will go and when and by how much, and you'd have to be awfully arrogant t think you know better.
I remember a Sri Lankan guy about 20 years ago had a fixed loan at about 30%. I would never, ever, ever, ever do that, even if the variable rate was 60% at the time.
I see the variable rate as the fair price to pay, and wonder why anybody would want to gamble on rates doing something in your favour, that the banks didn't expect.
I fixed my loan at 1.98% in October last year and the same 3 year loan is now 3.74%. It seems that my bank now expects that interest rates will be much higher than what I'm paying during the next 3 years. I don't think it was a gamble, I think it was a no-brainer actually. If I'm wrong, it doesn't really concern me as my repayments are still predictable and manageable for the next 30 months.
80% fixed? Aren't you going to pay off more than 20% of your loan in 5 years? It is such a long time.
20% would likely be well over 100k.. Not everyone has an extra 20k a year to burn.
Also watch the longer term fixed rate loans disappear (eg 5 yrs) so banks minimize risk of rising rates in longer term.
The bank always wins
I fixed at 2.02% for 3 years back in December, go on, tell me how that is a scam?
we'll have to wait and see what the rate is in December 2024, and how much it costs you to refinance to a better rate when it sucks, or how much more you'll be paying for the rest of the life of the loan, possibly. Or maybe you got lucky/ made an excellent informed decision. Time will tell.
Can't you say that about literally every decision you could possibly make about anything at all?
Mine is 100% fixed @1.99% until September 2025, I don't know how I can sleep at night… /s
Same, 100% fixed at 1.89% with 40% offset and $2k cashback. Only for another 18 months or so, but I think I came out ahead on that one. Literally the month after my refinance settled, the rates for the same loan at that bank went up to 2.29%.
Offset for fixed? blasphemy.
Well how about this - fixed at 1.69% for three years with full offset
@inasero: 😱 how did you work this magic?! Was it a special deal for OzBargain professionals like yourself?
as a general rule you are paying more for a fixed loan and thus it has already factored in a few rate rises thus you're likely not to get a better deal if you 'fix' for a period
fix loans in general are no popular in Australia i think people that do 'fix' generally have a split between variable and fixed
UBank in early 2021 had the bizarre situation of offering 2.09% variable, and 1.75% fixed for 3 years. I jumped at the offer.
Rates are on the way up and banks of course know this. Since mid 2021 they've gradually priced in the rises, so fixing now is probably too late.
Ubank will recover their loss by offering you a sucky variable rate in 2024 - prob offer a lower fixed rate again. Eventually they will win.
Then they'll just go to another bank and the other bank will even pay them to switch.
Same with St George. In April 2021 I was just coming off a 2 year fixed rate of 2.8%. I think the St George variable rate at the time was around 2.1%, but people were saying interest rates were going to go up. So I looked at current fixed rate terms. They were advertising 2year fixed rates of 1.89%. That sounded great to me. So I jumped on board, Im happy with that move. Now I still have 12 months to go at that rate.
Nothing Bizarre about it. They were basically predicting further drops in interest rates, when they think rates will go lower they give you a fixed rate below the variable rate as ultimately in that situation a lower rate will earn them more money long term. They don't lose money on it either as they borrow the money at fixed rates on the market themselves.
On the contrary when rates are falling you pay slightly less than the variable rate but end up losing as variable rates drop more than people anticipate.
The banks never lose!
In August last year, I split my new home loan into 30% variable (2.74%) and 70% fixed, which is at 1.99% for 2 years (Commbank). I think in this particular case, I made the right choice.
But at current rates (1 year 2.99%, 2 years 3.29%), I can see why it would be a hard choice,
yes well done!
On fixed interest you can't withdraw extra money in your home loan. I would guess that most people would have part fixed, part variable.