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?
Good question. We had unique circumstances they were willing to consider. And also offered lower deposit and waived LMI.
Fair
With refinance cashback deal, you can potentially switch every year. Depending on loan size, it could offset the difference. Offset and flexibility are also worth considering. I always prefer variable rate because i switch loan every year.
What impact does switching every year have on credit rating?
@Vote for Pedro: Generally everytime you refinance, your credit score increases. Homeloan is considered good debt and has positive impact on credit score.
If you fix for 5 years and have to sell your property, for whatever reason after 1 year, have fun paying out 4 years of interest unnecessarily.
Do you even know how a mortgage works ?
Once you sell your property, the mortgage is paid off, you no longer have an account unless there is money owing.
You will have to pay break fees, which are nowhere near the cost entire cost of the interest, but still unpleasant.
Not sure if still the case, but in the US there are no break fees. Makes you wonder why banks go broke over there, lol.
They go broke over there because over there some/most times you can just walk out on a home loan. And lose only what you have put in.
Unlike here, a city, town or neighbourhoods house prices can plummet and banks get stuck owning hundreds or thousands of near worthless houses.
If you fixed at a really low rate you may actually find the break free waived by the bank as its saving them money.
The big downside of fixed rates
as mentioned below you only pay break fee
and you only pay break fee if the rate is going down (ie. if bank will make less money breaking your loan on current rates) as a very simplified way of estimating
you know if the variable rate is above the fixed rate your break fee is going to be like $0-$200
lol not at all, you only pay break fees and they will be zero or close to zero if the current fixed/variable rates are higher than your locked in rate.
You only pay market difference, if you fix at 2% and a yea roster it is 3% you have no pay out
I don’t think you understand how break fees work.
With lots of talk of raising interest rates soon and so many people will be defaulting on their homes because of it,
Citation required.
To answer your question, the variable rate is lower, I don't like being locked in, and I don't think it's going to be going up astronomically in the next year or so.
It's pretty much a certainty that interest rate rises will push some people into default, the only question is, how many?
Statistically there will be some people on variable rates now who are only just managing, and a rate rise will mean they are no longer managing.
the only question is, how many?
Hence, citation required.
I fixed most of my mortgage in early 2021 for 3 years @ 1.75%. It was an easy decision, as the variable rate never got that low and I don't intend to pay off the house before 2024. Turns out I hit the absolute sweet spot of UBank rates, as now UBank offers 4.25% for 3 years.
The time to fix your mortgage was in 2021. It's probably too late now, unless you think we're going back to 4% RBA rates within a couple of years.
This is the complete opposite of a cluster f$#k 😉
but just imagine it's 2024 now. Your rate goes up to 4.5%, while everyone is with Athena at 1.89%.
… so he refinances to Athena at 1.89% ¯\_(ツ)_/¯
@SlickMick: Based on a loan of $300k, the difference between 4.5% and 1.89% over 25 years is more than $120k.
https://moneysmart.gov.au/home-loans/mortgage-switching-calc…
Jeepers, I think you need to sack your broker if they're telling you that refinance fees are more than that!
It saves you a couple years, but that's all.
Overall, you'll be in the same position of someone with a 30 year loan.
It's easy to say that people should do something to clean up their loans/finances.
But you'll likely find the vast majority dont know what they're doing when it comes to finances and don't want to mess with it.
Some are just too lazy or just pay whatever bill/invoice lands in front of them without question. I know many, unfortunately, that do this.
I knew someone that had opportunity to get refunded $20,000 of their paid stamp duty. I showed them how to get it back, but they couldn't be bothered and never did it not because they didnt need the money, but too lazy and preferred to play WOW instead.
Tell us more about this stamp duty refund!
How coul they have gotten a 20k stamp duty refund? What's the eligability?
Because as one of my colleagues said to me: "my family has always been banking with xxx bank."
Banks price their fixed rate home loans off the wholesale fixed term interest rate financial markets. It is this way they hedge their interest rate exposure portfolio, not just home loans but also commercial loans.
The wholesale market is forward looking and by the time banks raise their fixed rate then the wholesale market has already moved.
I would suggest the chances of the fixed rate home loan rates coming off in the next several years is zero.
The wholesale interest rate yield curve is positive, meaning participants expect interest rate to rise into the near future. (2yr gov bonds are yielding 2.09% and 15 year 3.07%)
My assumption with even a 1% rise, many with mortgages will scrimp and save on other things than letting their biggest loan falter.
The bigger issue would be a dramatic property price fall of over 20% for folks who have bought in the last 12 or so months.
Let us say someone bought a $1,000,000 property at 80% borrowings, now that property has dropped 20% to $800,000 - they have effectively gone from $200k equity (just a year ago) to zero, so if they had to sell for whatever reasons - they practically hand back the keys and receive no money back. Of course, if those borrowers had the capacity to service the loan then logically one would just keep the property.
Will properties drop by 20%? imo no way Jose.
Last time this happened was like 2008-2009.. interest rates went wild and people who had over leveraged were skewered. One senior executive at my employer had to rent out his PPOR, and pay a bit out of pocket… and then move in with his in laws.. along with his wife and 2 kids. It would have been painful for a bit, but his house in Roseville would be worth $4m now.
Last time this happened was like 2008-2009.. interest rates went wild and people who had over leveraged were skewered.
Leverage is a tool. It's a scalpel in the right hand that can be used to make life-changing money or a chainsaw in the wrong hand used to chop off their own limbs.
One senior executive at my employer had to rent out his PPOR, and pay a bit out of pocket… and then move in with his in laws.. along with his wife and 2 kids.
There is nothing more shameful than betting the farm, getting rekt, and having to tell the partner and children that they've to move into a shoebox.
People that can't manage risk deserve what they get.
but his house in Roseville would be worth $4m now.
Buying the dip works all the time, every time.
Why are people so worried about a +2.00% cash rate hike?
Sensible borrowers would've priced in at least 2x the rate before they sign a 30Y debt.
Not everyone is sensible, especially during a hot bidding war.
I'd imagine there's a lot of people who are really cutting it tight on their loans with how hot the housing market is. I know a fair few people who went beyond their budget by a fair bit just to nab a home (no pun intended) although most of it should be factored in already when applying for a loan but with inflation and cost of living going up its really adds to the mortgage stress. Also you underestimate how many 'sensible' people there really are out there.
Fixed a large part of my mortgage Dec 2020 for 4 years at 1.98%(calculated what I would save Max and left that as variable with offset). Was a great decision for us.
Stopped fixing after the first debacle we had some 20 years ago.
There's just too many restrictions. On average, variable will always come out cheaper.
And we started at something like 8-9% interest rates so 5% is no big deal
👍
To be fair, rates have only gone down for a decade, and even the decade before that they were trending down.
Maybe a very different ball park starting from 2% rates instead of 8%.
That said, I agree fixed rates aren’t good value today.
I lost several thousand fixing rates in 2008. But at the time a rise in mortgage payments would have broken my budget, and I slept fine knowing what I had to pay each month. I don’t recommend it, but there is a lot to be said for certainty about your biggest expense.
and so many people will be defaulting on their homes because of it,
WHAT!? HOW! These are record low interest rates. This is the CHEAPEST its EVER been to borrow money!
100% agreement. If defaults rise meaningfully with even 4+ rises it is a terrible indictment on regulators. No way should people be loaned money if 2-3% rates was all they could afford.
It should not happen but I am sure there will be panic in market even after 1% rise. And RBA has to stop after that.
People are not very good predictors of the future. They see a cheaper variable rate they would go for it.
In 2015 I fixed rate for 5 years as central bank keeps on saying they expect inflation to go back up and rates will increase. Didn't increase that much.
2005 I fixed for 3 years and rates did go up and come back down so I missed some of the increase
2019/2020 I fixed for like 5 years at bulk at 1.99% and a bit at 2.29% knowing that 0.1% central bank rates aren't going to last forever.
Fixed rates are only good if it is below the variable rate.
This is an important point. Economists get predictions wrong all the time. If it was easy, we could all just day trade our way to early retirement.
If it was easy, we could all just day trade our way to early retirement.
True!
Tell all those suckers at real estate training seminars and day trading courses.
When assessing a loan our assessment rate is currently 5.5%. this should enable the borrower to afford a few rides 6… however this means nothing if the borrower spends more than they should… Or groceries rise stupid %
As soon as there are more rate increases the fixed mortgage rates will also go up and you will be stuck between a rock and hard place. I prefer a repayment rate I know I can afford. I know I can't pay much more in any case and I'm allowed to get ahead of payments by 20k which I don't think I ever will in next 3-5 years. I recommend fixed terms just so you know you won't be blown out of your mortgage when rates increase fast. I close my eyes to variable rates and pay the fixed rate any time.
One other factor, fixing the rate locks you into that Bank - you can't switch for a better deal, etc. I know that seems obvious but it's a reason why a lot of financial advisors don't recommend fixing.
The break costs might be $nil in which case you’re free to move. People who fixed at below 2.5% likely have low or no break cost.
I would not go to a fixed rate because I am going paying double the minimum amount and you not many banks will allow extra repayments on fixed rates . I would rather have a variable rate (even if its slightly higher than a fixed rate and within reason of course) just so I can pay as much off as possible.
There are fixed rates that do allow extra repayments, $10k per year etc. There are limits to this though.
If you are able to pay off double the minimum then I'd agree variable rate is the way to go, especially as they are currently lower than fixed anyway.
There are a few fixed rate loans with 100% offset available
I'll always take my chances on a variable. Fixing is too restrictive for me.
Markets are pricing in 3%+ interest rate next year. If you fix now, you will lose out if if the rates don't get that high.
https://www.theguardian.com/business/grogonomics/2022/apr/06…
I don't think current fixed rates represent good value. I fixed for 3 years late last year at 1.86% and luckily that seems to have been the sweet spot. The same lender now has 3 year rates at 3.79%. The ship has sailed.
To me, the current media speculation about interest rates is clickbait and scaremongering. Talk of 6-8 RBA increases to me is ridiculous in a place where people have so much debt that even a couple of increases will have major effects on people's spending. Also we have a government that will not let the housing market fail, as our economy is so heavily dependent on the "wealth effect" high house prices gives to home owners.
You can still get variable rates around 2%, so it would take around 8 RBA increases (I refuse to use that stupid "hike" word that the media love) to overtake the 3.79% fixed rate noted above. That many increases over that period of time would kill the housing market and spending economy in my view. You are talking about many homebuyers having to find well over $10k more per year with the type of borrowing people have.
I do think there's been a deliberate attempt to use the media speculation to try and take a bit of heat out of the property market. Also the media are lazy with their inflation has gone up therefore interest rates must rise mantra. The economy is far, far more sensitive to interest rate movements than ever before so the assumption that rates must head back to around 5% or more because they have in the past doesn't work for me. No amount of RBA action will for example do anything to reduce petrol prices which, because they flow on to the price of everything else due to transportation costs, are a big factor in CPI data. That price is set overseas and we cannot control it.
Finally the low unemployment argument that says wages will have to rise and therefore inflation will increase. Firstly, our borders are back open so more labour will arrive that hasn't been available for a couple of years. Secondly this nonsense completely ignores the huge amount of underemployment, low income gig economy roles etc. Yes those people are not technically "unemployed" but I'm sure they would all want something better.
8 increases at 0.25 each time is 2%.
While id be disappointed, I factored that into my calculations.
On an $800k loan (not uncommon now) that's an extra $16k per year for people to find. In my view inflation will fall quickly before we get near that point.
On an $800k loan (not uncommon now)
People are fooling themselves if they think variable rates will stay at levels of the last 10 years for the next 30 years.
One good reason is 10 years of whatever the cycle has already past so 20 of the 30 years have passed. It is like being late to the party and expect to party for the full 8 hours but there is only 5 hours until sunrise.
@netjock: So, they’ll drop further? “Past performance is not necessarily indicative of future performance.“
@Ulysses31: You need to learn to read. I was talking about the past. Making no predictions about the future.
Abrasiveness isn't a highly regarded social skill neither is illiteracy.
People who can afford to borrow $800,000 can afford to pay an extra +2.00% APR.
@rektrading: I have a friend who has (him and his wife) foolishly been starry-eyed by the banks "what can I borrow" calculator and are living on the edge with a 1.25mil house. If rates go up to 5% they are looking at 2 grand more a month in payments.
I'm not sure I'd agree, especially with the crazy buying spree people have gone on over the last year. This will be interesting to watch.
@meowsers: Your friend could end up like this post.
https://www.ozbargain.com.au/comment/11976798/redir
I see 10,000s people getting liquidated every day because they don't understand risk management. They want the shiny new thing and will take shortcuts to get it.
Getting rekt is the tuition they should've paid before taking on the debt.
I see 10,000s people getting liquidated every day
If this were true, our economy would have collapsed. In 100 days a million people getting liquidated? I think not.
@Vote for Pedro: 39,730 people liquidated for a total of $94,61M in 24H.
https://www.coinglass.com/LiquidationData
People who don't have an exit plan before they take on debt are slaughtered meat no matter which market they're in.
All the over-leveraged Joneses will get what they deserve when there is a forced deleverage.
@rektrading: Or an average ‘liquidation’ of approx $2,500.
Also, without digging into that website, is it global and is it just crypto?
Or an average ‘liquidation’ of approx $2,500.
Don't worry this guy lives in the metaverse. If you believe half the stuff rektrading posts you are in deep trouble.
@rektrading: While I agree over-leveraged will take a hit, if there is large scale default or risk of a default there will be a government bailout, mark my words.
I agree that $16k is aa lot to find. But budgeting for at least a (modest) 2% is what most lenders and most advice tells you to do.
That might mean buying a cheaper property, though i acknowledge in Sydney that is a difficult proposition
@Vote for Pedro: That's true, but my point is it won't take many rate rises, far less than 2%, for it to have a significant effect on spending and therefore inflation.
Also consider off-set accounts have a reduced impact on the loan at fixed rates.
This is the reason I don't fix all my home loan. Offset as much as you can in a variable offset account and fix the rest.
Also note that when you fix a loan you're locked in for 2+ years and will have to pay a fee to break out of it. If the new rate isn't too much different to the one you locked in originally its unlikely to be worthwhile without some other cashback incentive.
Not sure what break costs people keep referring to.
As with my other comments, if the wholesale rates are rising which they are, there is no break cost for many if not all lenders because there is no loss to the bank, so read the contract.
The ability to make extra payments (usually capped on fixed rate loans) or the ability to have an offset account would be big reasons for people to choose variable over fixed.
They aren't really capped, in a theoretical world where the fixed rate is higher than a variable you would be charged a fee.
However given how low the rates were vs the wholesale rate which the penalty is calculated on there aren't penalties for prepayment on the majority of fixed loans these days because of the rates. Even if they are in the contract, the mathematics don't result in a penalty being due.
Nah, plenty of options for fixed rate loans with offset accounts.
Is it hard to find a decent mortgage broker? Over the 14yrs so far - my previous broker (10yrs) made bad calc's and didn't follow up with me ever. My current broker (4yrs), I was transferred to a new broker internally. Whilst they follow up every 6 months there was false advice and really bad timing issues. So here I am looking again when my fixed is up Aug-2023.
Use ratecity website and arrange it yourself. Brokers don't have access to all products
I am very happy with mine, have financed twice with him. PM me if you want to know the details.
My view is the market already priced in the risk with interest rate hike with all the signalling from RBA over the last 12 months.
Lenders, banks and homebuyers are already taking cautionary approach and I don't think RBA has real appetite to jack up the interest rate more than 0.25%. I reckon low variable rates are a better choice in the next 2-3 years.
Yeah I agree
fixing your loan is both restrictive and is betting against the bank on who can make/save more money. im not betting against the bank
I'm not sure what you mean by restrictive. If you want to pay a fixed loan in full — or even in part (exceeding the yearly limit), you're not going to owe the bank money when variable rates ( read. wholesale rates) are rising.
Break Cost = Loan amount prepaid * (Interest Rate Differential) * Remaining Term.
If the wholesale rate is rising rather than falling, you owe nothing because there is no loss to the bank.
When a 3 bedroom house in Campbelltown is $1 million, there is a problem.
I think most fixed loans don’t allow 100% offsetting (maybe I’m wrong). That’s why I go variable, any money put into redraw or offset reduces that much interest. If I have enough money that offsets all the balance principle then I don’t care even if the interest goes to 20%.
With fixed that’s not the case.
Correct. ANZ for example allows offset on 1 year fixed but not on 2 or more year fixed. Others don't offer offset on any fixed rate terms.
Why Aren't People Fixing Their Home Loan?
Not broken?
There are a few factors to consider in fixing loans:
1. Fixed rate vs variable rate
2. Your future cash flow projections
3. Your expectation of rate's in the future
4. Your loan time horizon
We got burnt a couple of years ago because we fixed too much and ended up with surplus cash that we had to stick into a savings account because it was too expensive to break the loan compared to just accumulating the cash and getting a small amount of interest and paying tax on it.
Conversely, last year we fixed $200k for 1.89% for 2 years so yay against a variable rate that would have been around 2.3% over the same period.
We also fixed some for 2.04% for 1 year with offset and have just been able to negotiate the same rate for variable when the fixed rate expires at the end of this month. To refix would be at 2.99% for 1 year with offset.
At this stage, our plan remains for each property to have some fixed and some variable or fixed for 1 year with an offset.
Last year fixed rates were generally better value for a range of reasons including banks wanting to lock in customers. Variable seems to be the go now but i haven't checked in with all banks so YMMV.
There is no right or wrong way to do it, it really depends on your own circumstances.
Too late to be fixing now.
Fixed won't end up cheaper (You think you can out calculate the banks?!). You end up paying more for the certainty of a fixed bill each week….kind of like those guys who keep making apps about streamlining all your bills into one payment.
Silly question, why does anyone pay a variable rate of 2.74% when 1.98% is available. What keeps you with commbank?