Hi All,
I pick one of the example from Ubank.
https://www.ubank.com.au/home-loans/own-fixed-rate-home-loan…
Either owner occupied or investor both the same because comparison rate is around 1% lower than the interest rate.
Example:
LVR up to 60%
Fixed 1 year interest rate 5.19%
Fixed 1 year COMPARISON rate 4.27%
Could you please explain why the comparison rate is lower?
If I borrow $100k.
Do I get charge for interest 5.19% or 4.27% for 1 year?
Thank you for your time and help.
Do I get charge for interest 5.19% or 4.27% for 1 year?
If you fix at 5.19% for 1 year that’s what you get charged.
Could you please explain why the comparison rate is lower?
Because the revert rate at the end of the fixed period must be lower than the rate during the fixed period.
Yes this commenter is correct.
The revert rate is you going back to variable and the calculations assume the variable rate is lower than the current fixed rate, so when you calculate it out over a 25 year period, the comparison rate works out to be lower.
Fixing your rate is a gamble.
You are gambling that the rates will go up further in the future.
The fixed rate is higher often because the Bank has to guess what the rates are in 2, 3, 4, 5 years time and build in a bit of fat.
In most cases where the borrower wins this bet it will go somewhat like this :
Year 1 - Lose as the Fixed rate > Variable.
Year 2 - Breakeven as the Fixed rate on par with Variable.
Year 3, 4, 5 - Win as the Fixed rate < Variable.
In my experience in banking the Bank wins more often than not as :
Oddly enough the current situation is where a lot of punters will get ahead because no one saw that there will be a war which together with the lasting impacts of the pandemic causes so much shortages and inflation that monetary policy tightens so quickly.
If you locked in for 5 years before the war and everything shortage, you will already be ahead.
Leaving it at variable is a gamble as well. If anything it's more of a gamble because the answer on what your rate will be in the future is "who knows?"
Banks don't really have a clue what will happen in 5 years either but they do hold significant amounts of fixed term funds from customers and can hedge against movements. They also have their regular deposit accounts that are basically earning 0%. So all they need to do is look at how much funds they're holding in 5 year fixed deposits and how much they're lending out at 5 year fixed rate home loans and find a hedge for whatever the difference is. They'll never lose money on it, despite not being able to predict future rates.
Leaving it at variable is a gamble as well
It is like index ETFs, you just blame the market.
Banks have no idea but against a normal person on the street they have a few more heads thinking through it. Unless you are in the know then you might be out of luck.
I managed to score a block of 5 year fixed at 1.9% (finishing 2025) and another block 1.9% until Nov 2026 but then that was when the FED said inflation was transitory and the markets called them bluff and banks were slow to raise fixed rates vs central bank rates.
Here goes my unqualified opinion.
I think the bank knows better than us. And they have all the power when setting the rate. If they make you think fixing is better (fixed rate is lower than variable), I’m sure it isn’t, it means the variable will go lower as soon as you fix. Like wise if the variable rates are lower than fixed they are trying to keep you floating without knowing rate rise is coming.
Fixing removes risk as well. I fixed for 3 years at just under 2% last October. If interest rates had gone down, I would just wear this as the cost of removing the risk that my repayments would increase to uncomfortable levels. I was happy with the rate offered so I would only "lose" if I looked at other people and saw that they had a better deal than me (if rates went down). I was very confident at the time that rates would go up though and so far that confidence has been justified.
Banks don't have to get it absolutely right either. They can afford to be a little bit wrong. They just have to make money on most customers over the long term and that's probably going to be the case when they lend money at a higher rate than they borrow it themselves.
The headline on this story is backwards.
The OP asks why the interest rate is lower than the comparison rate. Then gives an example where the comparison rate is lower than the interest rate.
Doesn't seem to matter, as replies seem to be about the merits of fixed rates versus variable rates.
Because the bank has a whole floor of analysts and economists that believe in 6 - 12 months the RBA will be lower rates than today or alternatively they can lock in a swap at the rates right now.
If the bank has already thought about it you won't need to. But then I did get 1.9% locked in until 2025.
I work for a bank. The comparison rate is based on a $150k loan over 25 yrs (from memory). A fixed loan converts to variable after the fixed period… When the variable rate is lower (say 4%) than the fixed rate (say 5% for 5 yrs) it means the initial rate is higher than the long term rate - ie 5% for 5 years and then 4% for 20 years (the calculation assumes rates will not change)…when averaged out the comparison rate will be lower than the fixed rate and higher then the variable rate.
Re: choosing fixed vs variable…I have fixed my loan because it was the right thing to do in my personal circumstances but generally I believe banks have a bunch of people much smarter than me analyzing what rates will likely do so to think you can fix to save money is probably similar to thinking you can beat the casino…
Before AndyC1 potentially asks what did the bank say when you ask them, I thought to quote that footnote next to the comparison rate:
But im still as puzzle as you