Interest Rates - Fixed or Variable

[flashpixx]

Righto, usually I can be reasonably confident I can deduce which way interest rates will trend in a 2 - 5 year window. At the moment I've no idea. Up until the Tsunami and Libya was invaded, and the general trend towards resident unrest in the Middle East, you could reasonably expect a steady upward trend.

So... oh clever ones, which way are rates trending in a 2 - 5 year window?

If you had a loan that was fixed for the past 5 years @ 7%, would you refix, go 100% variable, or some mix of the two?

[HughDMan]

I just refixed mine. I mainly fix mine so I know exactly what I'll be paying month after month for the next x years. The 3 year fixed rate was pretty close to the variable rate with my loan.

There are pluses and minuses with both, ie with my fixed loan I can only pay an extra $10g a year.

Stick with your gut.

[Deicide]

As far as im aware (an i have very little understanding of finance) the only reason to fix your loan is, as HughDMan mentioned, so you know exactly how much your monthly repayments are, Otherwise not much of an advantage??

[out_in_front]

Never fix - the banks know how to price them so they always end up taking more money off you and will never save you anything - they dont want to lose their profit margin!

The only time to do it is if you are so far stretched that you know if the rate goes above that limit you will not be able to make the repayments - and it is likely too (at which time I would look at downgrading the house for something cheaper anyway - because it is clearly not affordable)

Currently the rates are at 7% - you fixed for 5 years at 7% up till now - meanwhile the rest of us were paying 5-6% for the majority of that period - easy to see who saved the most money thorugh that period... You think next time will be any different?

[Thunderbird]

Dont fix them. I fixed mine for 5 years several years ago when the variable rate was around 7.9 and planning on going up. Mine was locked in at 8.15 and it was good for 6 months when the rates moved up to almost 9. Then they dropped all the way down to 4.x and I was stuck paying $800 a month more than if I was on a variable rate. If I had wanted to break my loan it was going to cost over $50k. An expensive lesson learnt.

The other option is I think some of the banks now have loans that you can lock in at the current rate and as the rate drops your loan follows it but if it rises it will only goes as high as when you signed up. This probably has a higher annual and setup fee but may be worth looking at.

[HughDMan]

December 2009 rates were around 5.55% Now they are around 7.79%. The banks don't know what is around the corner, hence they increase when the rba increase and sometimes decrease when the reserve bank decrease. I have no crystal ball that is why i fix. You will hear some doomsayers who have lost out but I can guarantee that all those people who fixed their loans in December 2009 are laughing alot louder than those who opted for variable.

Downgrading a house will cost you approx $40,000 in fees agents and banks. I disagree with the above posters ie if you are so far stretched is the only time to do it. If you choose variable and the rate goes up a couple of percent you can easily be screwed over. Fixing your rate gives you certainty in an uncertain situation.

When I sold an investment property and broke my fixed term the bank didn't charge me as the current rate was higher tham my locked in rate, so they were better off.

[Deicide]

If you want actual advice rather than speculation- I strongly suggest giving Shawn a call -http://www.approvedallloansgroup.com/
Its what I did, and im very happy with how my loan is set up-there are other options with loans that can save you $$.

[out_in_front]

It also depends on the size of your loan - if it's starting to drop in size relatively quickly (probably less than 150k - probably closer to 100k would be preferable)- by paying the same amount as the fixed rate and just putting the rest into dropping the capital, you may be able to absorb the rate rises as the reduction in capital should offset it. Anything over that and it wont make as much difference in changing the minimum repayments.

[STUART]

Dont fix them. I fixed mine for 5 years several years ago when the variable rate was around 7.9 and planning on going up. Mine was locked in at 8.15 and it was good for 6 months when the rates moved up to almost 9. Then they dropped all the way down to 4.x and I was stuck paying $800 a month more than if I was on a variable rate. If I had wanted to break my loan it was going to cost over $50k. An expensive lesson learnt.

The other option is I think some of the banks now have loans that you can lock in at the current rate and as the rate drops your loan follows it but if it rises it will only goes as high as when you signed up. This probably has a higher annual and setup fee but may be worth looking at.

yep im with you and never again
got locked in at 8.6% for the last 3 years coz at the time they were talking about going over 10%, shit hit the fan in the world and i got stuck on 2 morgages at that high rate ...was going to cost me over $90k to get out so i just put up with it, only thing that didnt make it so bad as they were negatived geared

[Jim621]

The choice is up to the individual to fix or not to fix and it will depend on the size their mortgage, job stability, wage etc etc.
to make an informed decision you need a crystal ball if you ask me.

in regards to advice you can learn alot from what the banks are charging for a fixed term mortgage - after all they would employ the best people in finance.

[courtz]

We have a 40% fixed, 60% variable loan. Everyone we got advice from recommended a mix of both to some degree. Fixing part of it offers some stability, whilst having the other part variable means you won't get completely screwed should interest rates drop. My parents still recount the days where interest rates hit 17% - having 100% variable can be risky!

We got our loan when variable was about 6%, we fixed for 3 years at 7% due to forecasts of interest rate rises totalling over 1% in the next year (which indeed happened). So in the end it worked out really well for us - I'm more than convinced it won't be too long before another interest rate rise comes, which makes it worthwhile having locked in at 7%.

[HughDMan]

on the cba website interest rates are as follows

7.81 % variable

6.94 % 1 year fixed
7.14 % 2 year fixed
7.24 % 3 year fixed
7.59 % 4 year fixed
7.64 % 5 year fixed

Based on these rates, one would be mad not to lock in the 3 year rate. It is all speculation, no one knows what they are going to do. By fixing it you are guaranteeing your monthly payments won't rise. Yes if they drop you would off been better off, but by the rates quoted above you are already in front .57%.

I've never had a split loan but I didn't like the fact it was two loans and you had to pay the two lots of fees ie if you want to change to fixed at the end of the period.

One question I would like answered by anyone in the know, "Why at the end of your loan if it's fixed, is the loan automatically rolled over to the variable rate"

But the correct answer is do what the missus says that way if it goes shit you have someone to blame.

[courtz]

You only have to pay the fees if you choose to re-fix your loan. If you don't want to fix all/part of your loan again, then as you say - it just automatically reverts to variable.

I don't work for the bank, so I can't speak for them... but I'd say the reason you have to pay a fee to fix part of your mortgage would be due to:
a) 'administrative costs' incurred by the bank for fixing your loan (ie someone has to type a few words and figures and click the mouse a couple of times); and
b) in the eyes of the bank, a fixed mortgage is doing the customer a favour - banks never do useful things for free, hence they charge you!

[Homie]

I have been doing a lot of split loans at the moment for client who want a bit of safety & also a portion they can pay extra on? also it helps with the budget & if rates run up it wont kill them paying there mortgage & they can still live?? also if rates run down then they also save as well with the variable coming down??

the banks are doing some great deals at the moment trying to win business.

[thro]

the bank likely knows better than any of us where rates are likely to go, and how far.

hence, they will fix at a higher rate than variable to maintain the same profit, or better.

now i am not a financial advisor... but... 2c....

fixed rate mortgages are just a rort, relying on people's fear of another 1987. they're typically only fixed for some small maximum duration (in relation to your total mortgage life), and its pretty darn unlikely that rates will move by more than 0.5-1% upwards (which they'd need to, for you to be "behind" if you'd taken a variable rate loan) in that time-frame.

but, meanwhile you are unable to take advantage of the lower rate TODAY or if it drops in future.


i say go variable, make use of the lower rate TODAY to pay off more principal ASAP and reduce your total amount repaid... every dollar not paid off your mortgage NOW because you wasted it on an additional percent of interest (to go fixed) will stick around for years, accruing even more.

I guess fixed is OK for you to know exactly what your minimum repayment is, but why make the bare minimum repayment? pay off as much as you can, and take advantage of the lower variable rate to knock the principal off... fuck... even an extra 5-10% on top of your minimum payment per month will cut HEAPS off your total amount repaid - over the life of the mortgage, as its increasing the amount of principal repaid by a LOT.