Don't lock in your rates!

As I was doing research on whether fixing my home interest rate is a good idea or not, (as in this post and this post), I came across this article on www.domain.com.au which has a 5 point attach on the rising interest rates.

I particularly unimpressed with their point #2, which says.

If you are tempted to lock in your rate - don't; it's too late. The time to fix is when rates are on their way up, not when they have already increased 11 times. While rates may go up once or twice more, by the end of the year slowing global growth on the back of the subprime crisis should force them downwards again. What's more, at the very time borrowers might feel panicked into fixing, banks have been quietly putting up these rates such that for the first time in years the average fix is higher than the variable rate. Cynical indeed.

Those whose finances really couldn't cope with one or two additional rises could consider fixing for a maximum of one year - but lock in for longer and you risk being stuck for years paying more than you need to.

I am truly amaze that it is advising people to not fix their interest rate as it is already too late. For some it may be too late, but rather than just give a blanket advice of not fixing the interest rate for more than one year, it should have provide some advice on doing the calculations to determine if fixing the interest rate is going to work out for you.

It is also pure speculation that the interest rates will increase twice more by the end of the year and it is predicting that the interest rates will be going down again in about a year's time. This goes against the forecast by RBA, as reported by this The Age's article.

For me, if after doing the sums, I am able to save some money or remain status quo, then it is worth while for me. Who knows when the interest rate will be decreasing, and more importantly, how many more increases will the interest go up by?

The other four points are worth considering.

Update on fixing the home loan interest rate

We visited our bank today to discuss about fixing our home loan interests, and the discussion brought up some interesting points. These items will have to be taken into consideration when deciding if it is worthwhile to switch our home loan. Some of these points are

1. If we fix all our home loan, we are able to pay extra into our home loan but only up to $5000 per year without being penalised.
2. If we are to just switch our current home loan from its current package to a standard home loan package, the cost is only $200. However, if we have opted for a split loan where a portion of it is fixed and the other is variable, it will be considered as a new loan and all paperwork will have to be re-submitted. This also means that a new set of fees will be applicable as well, including that bug bear mortgage insurance!
3. The point which mortgage insurance is needed is based upon the value of your property and the amount of loan. This is important as the value of your property may have change. This may not be applicable for us as our property value has increased since we moved in.
   
4. The current fix interest rate is 8.54% and 8.44% (depending upon the term of the loan), which is only 0.02% more than our current home loan interest rate. So if we lock it in now, we will probably not notice any affects on our repayments.
5. The actual interest rate on your fixed interest rate home loan is the rate at the time of execution of the loan by the bank. What this means is that if the fixed interest rate changes from when you signed the papers to when bank accept and counter signed your signature, the new interest rate will be applicable to your home loan.
6. Our bank has effectively discontinue our home loan offset account as we need a minimum balance of $5000 for it to be offset against. In some ways, this is like having $5000 earning 8% interest but we don't have $5000 sitting around, so this is not a good option for us. This also caused us to investigate fixing the home loan.
   
7. The banks may not change its fixed interest rates as the RBA changes its interest rates. The fixed interest rates are does not enjoy a high profile a such as their variable counterparts, so we don't hear much about it in the media when it changes.
   

Our next step is to talk to a mortgage broker such as Aussie Home Loans, and see what they have to offer. We have had good service from our current bank in the past, but at this moment and the current economic climate, we have to look at our bottom line and bank loyalty will have to take a back seat. If we have to change bank, we will do it.

In a prequel article to this, Sarah pointed to an article on www.domain.com.au that talks about how the banks plays with the fixed interest rate. Many thanks to Sarah

photo credit: Jan Stastny

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Carnival of Personal Finance, #139 - Valentine's edition

The CoPF #139 is up and having a jolly good time over at My Dollar Plan. The theme of St. Valentine's Day was nicely worked into the list of great articles as well.

I was fortunate enough that my article on interest free period was chosen.

1. One Girl's Quest has a nice spin on setting goals and how to work towards reaching the goals.
2. Chance Favors talks about early termination of mobile phones.
3. Moolanomy has a great article on how to deal when a goal is missed.

These are my top 3 articles from the compilations, but there many more articles available on a variety of money subjects. Go check it out!

Fixing our home loan interest rate.

With the RBA increasing its policy interest rate to 7%, and the flow on effect on the major banks increasing their interest rate by 0.30% ( which is 0.05% more than the RBA's increase), it is time for us seriously investigate fixing our home loan rate. As this table of previous rates shows, it has increased eleven times over the last six years. The article in the The Age also predicts that the interest rates is due for an increase on another four future occasions, so we are really preparing ourselves for the worsening conditions.

With the loan package that we are currently on, we are currently enjoying a 0.6% discount on the normal variable interest rate, which is below the current Fix interest rate. however the beauty of a fix interest rate is that it is fixed and won't increase in line with the predicted RBA's increases.

What factors do I need to make sure that switching over to a fix interest rate is the better way to go.

1. The fee incurred to switch the home loan over to a fix interest rate is smaller than the savings in the interest repayments. I am pretty confident that it will be.
2. The length of the fix interest loan will need to be carefully considered. If the length of the term is too long, we may miss the drop in th interest rate when it falls down, however i don't this is likely within the next six to seven years. If the length of the term is too short, we risk going into a higher interest rate when we exit the fix loan. We will probably be negotiating for a 3 or 4 year term.
3. The current fee structure does not change significantly as we quite like it. We get $0 fee on any of our account at our bank, because of the home loan that we have.
4. We are still able to pay extra into our home loan.

If the interest rate is like to increase another four times, and we are able to stay at the current rate, we are like to save about $200 per month. This is something worth striving/negotiating for.

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My first credit card at 22 years old

I just read a post over at JosephSangl.com about his first credit card. It caused me to think when I got my first credit card. I think it was just when I graduated university at a ripe old age of 22. It was a Visa card issued by the State Bank of Victoria (it shows how old I am!)

When I got it, the bank must thought I was a high credit risk and put a $500 dollar limit on it. Even with $500, I really thought I have hit the big money! Back then, and as now, $500 at my disposal was a great responsibility. At 22, I was very conscious of how much is being spend on the card, and paid it all at the end of each month. This pattern of usage occurred for next 10 years. I think the ability of paying off every month has caused me to become complacent in recent years. My spending habits was not kept under control and have lost its way.

My credit card limit increased from $500 to a massive $20,500 over those years, and the card status kept increasing. I even managed to be a platinum card holder. It finally maxed out at $20,500 one day and I knew that credit cards are a real problem. Through hard savings and careful budgeting, we have just managed to pay off the credit cards. We have also reduced our credit limit to something more manageable. Having a $20,500 of credit card debt is something I don't ever want again.

Now that I have a son, I wonder when he will apply for his first credit card. Should I give him a secondary credit card with either my wife or I as the primary card holder? This way, we can teach him that it is a privilege to have a credit card. It is a card that is very powerful that can either cause many financial headaches if not used properly or become a very good financial tool if used correctly.

Any thoughts?

Update: I just came across a great guest article at The Digerati Life along similar lines.

Making use of the interest free period

A number of years ago, when my wife and I are just starting to settle down, we purchased a central heating system into our house. Mainly because the original heating system broke down and was costing us more to continue to use it. Furthermore, it broke down just the start of winter, so we must get something in quickly.

At the time of the purchase, our cash flow situation did not allow us to make a cash purchase. So we entered into a 12 month interest free purchase agreement. It works by having to pay 30% of it in cash, and the 70% is on credit, interest free for 12 months. Over the 12 months, the only overhead is an monthly administration fee charged by the credit company, a flat fee of $2.00.

Initially, I was particularly nervous about this arrangement as it forced us to be discipline with our repayments and we must ensure that we have the money when the repayments are due. The penalties are quite severe if we miss a monthly minimum payment. For example,

• overdue fee : $27 to $35
• over limit fee: $20 to $30
• interest rate: 28.99%

Yep, the interest rate is 28.99%! Once these are incurred, the interest free period is expired.

Our strategy was this...

1. calculate our monthly repayments by dividing the amount owing by the number of interest free months.
2. setup an automatic transfer form our bank account to the credit company's account
3. monthly review to ensure that it is on track to be paid off before the interest free period expires.

In the end, it worked out well as we paid the amount owing before the expiration of the interest free period.

One thing to look out is the month statement from the credit company. The minimum repayment amount in the statement is the minimum repayment amount, which means that if you are only paying the minimum amount, it is highly unlikely that your debt will be paid in full before the interest free period expires. This is why I calculated my own monthly repayment amount.

We study the terms and conditions quite thoroughly before entering into this agreement so a understanding is gain on the penalties.

photo credit: Andrew Beierle

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top 3 referrals

I have just signed up to Google Analytics, mostly as to see what they are about. My previous way, and very simple way, of analysing any traffic into my blog is via sitemeter, and I initially used sitemeter as a glorify hit counter.

So what has Google Analytics told me. It told me that my top three source of traffic are crazyjimsmith.blogspot.com, eliminate-my-debt.blogspot.com and debtdieter.blogspot.com.

Let's have quick tour of these three sites.

crazyjimsmith.blogspot.com

crazyjimsmith.blogspot.com can best be summed by its by-line on the blog. It quotes...

This blog provides commentary on stocks listed on the ASX, most things to do with investing in the sharemarket, politics, the economy, and anything else that may take my fancy or infuriate me!

This blog has plenty of comment and analysis on various stocks listed on the Australian Stock Exchange. Personally, I am not interested in stocks, only as a casual bystander. However, if I was, I would be very active reader and participation of the blog and its accompanying forum.

eliminate-my-debt.blogspot.com

eliminate-my-debt.blogspot.com is a PF blog. The by-line on the blog reads..

My goal is to pay my $152,377 mortgage in 5 years: 30th June 2012. I started this blog to stay motivated and I would love to hear from other pf bloggers out there!

It is certainly provides an insight into an average Australian family on their day-to-day living, particularly from a personal finance perspective. I especially like her articles on money and relationships. Some of her comments are very enlightening.

debtdieter.blogspot.com

debdieter.blogspot.com is a blog about the reduction of a debt, and the juggles of a hectic city lifestyle. The byline of the blog quotes..

Working hard to eliminate $56,722 of consumer debt and become debt free by May 2010...

The series of articles on her work perks are a fantastic read. It definitely shows what, and how work can be used not only to produce an income, but also use to reduce spending. The recent article on work assisted education is a great article, and instigated some thoughts on how my work can assist in my education.