Tuesday, 11 November 2008

Fixing our interest rate - a retrospective

Back in February this year, we fixed our home loan interest rate for the the next four years. Now that we are coming up to the one year anniversary, and falling interest rate. It is interesting to find out if we have made the correct decision.

One of the things that fixed interest rate gave us was a peace of mind. Like the many mums and dads out there, I don't really have a clue on which way the interest rate is going. At the time when we fixed the interest rate, it was on the way up. Looking back on it, it pretty much hit the top and is starting to plateau. However, we missed about two interest rate increases. Furthermore, the fixed interest rate gave my wife and I a peace of mind and some certainty on what our monthly mortgage payment is going to.

Now that interest rates are on their way down, we are considering re-negotiating a new loan. However, among the fees that the new loan will incur is an re-establishment fee, which will be about $600 to $700 and mortgage insurance if the new loan amount is more than 80% of the loan (a few thousand dollars). A calculation will need to be made to determine how much will be save and the saving will begin when the fees are taken into account.

During the reconsideration of the new loan, we are not going to limit ourself to our current bank. Perhaps we should consult a mortgage broker to see if they can secure a loan with a low cost.

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Interest rate fixed

7 comments:

Nickname unavailable said...

I assume this is a problem for thousands of mortgagees around Australia and the world at the moment. 12 - 18 months ago rates were increasing and squeezing everyones budgets. Many people including myself fixed some or all of their home loan. I was lucky that i locked in only half our loan and only for 12 months. I did this after reading a Ross Gittens article on smh.com.au which noted that while rates were increasing, at 8%, they were still 3% or more above the rate considered neutral. Rates above 5% or so are considered tight monetary policy as they restrict economic growth (read inflation). Rates lower than 5% are considered expansionary monetary policy which stimulate the economy. Expansionary rates are needed in times like this so some economists are predicting rates below 4% early next year in Australia.
I guess what I am saying is only fix your rates when they are 5% or below and look like rising. Most people that fixed in the last 12 months locked in high 7 or low 8% rates for at least 12 months but most likely 2 - 4 years. This will prove costly unless you refinance or break your fixed portion. While breaking the fixed portion comes at a cost, of up to $2000 depending on the loan, it is most likely worth changing in the long run.

tehnyit said...

Thanks for some of the good insight on one wayt to go about deciding when to renegotiate.

I am with you on the 5%. We are probably not going to seriously look at breaking the current loan until the interest reaches about 5.5% to 6%.

bewo said...

My strategy to minimise the interest paid even though our fixed rate is now higher than the variable is the following. Change both loans to min repayment and then make extra repayments against fixed loan up to the most we can afford. Also note that offset accounts do not offset against fixed rate loans. We are thinking about moving most of the surplus funds from our offset accounts into the fixed loan until it matures therefore making those funds offset a higher rate loan.

tehnyit said...

Bewo, thanks for stopping by.

That sounds like a good strategy. We are doing something similar with our fixed interested loan. However, there is a fixed limit, $5000, on how much more we can contribute to the loan.

Just be aware of such charges as the penalty for exceeding the limit are quite high.

Jaeneen Cunningham said...

We had this very same discussion with a customer some time ago. We had placed him in a loan with a non-bank lender. At the time it was as competitive as any loan on the market. Then the sub-prime issues developed and the cost of funding non-bank loans increased more than the regulated banks. Of course this meant we lost credability with the customer.

Back in February he told us he had approached a main-stream bank about a fixed rate loan. We were concerned because we felt strongly that rates were sure to come down given developments in finacial markets. However, as I said we no longer had credibility and our customer signed a 5 year fixed rate contract at 9.10 per cent! The loan he left now has a rate of 7.38 per cent with further falls to come I'm sure (it was 9.13 when he fixed with the new bank).

Apart from loosing a customer, we were very disapointed with the actions of the bank that refinanced him. Is obvious they were aware of the potential for rates to fall and at the very least, a 5 year term was too long.

We experienced something similar with another bank. A customer advised us that they had received a letter offering them fixed rate loans of 2 and 3 years around 8.50%. This letter went out to customers only weeks before rates began to fall. Soon thereafter, 2 and 3 year fixed rates fell to just above 7.00 per cent.

tehnyit said...

Jaeneen,

Our bank certainly did not provide any good advice either. Certainly, in hindsight, the four year loan term that we are on is definitely too long. Perhaps we should have gone for a one or two year term.

I tend to believe that the banks wants to lock their customers in on the longer term (4 year or more) as reflected by their lower interested rate for those terms.

Most people tend to believe that the banks are there to service the the general public. This is wrong as I believe the banks are there to maximise their profit.

Vincent Falzon said...

I work in the finance industry and can offer the following advice;

Generally, fixed interest rates end up costing you more, on average. Of course, you can be lucky and lock in a low rate in the beginning of a period of successive rate rises.

The way to think about it is practically everthing a bank offers these days is driven by profit, if a bank could not profit from offering a fixed rate, than it would not do so. (notice how the fixed rate is always higher than the variable rate)

Usually its best to go for a variable rate unless you would not be able to cope with unforseen increases in the interst rate.

Thanks