Why the new fixed rate loans are almost like a variable loan – or are they?
We all want the best deal possible and that often means looking for the best rate out there that fits our circumstances. However, at what point do we begin to forward plan and treat our finances a bit more like a business would. Rates are low now and they have been for many many months. Global uncertainty as well as geopolitical events have many commentators believing that rates will be low for a long time to come.
As mortgage brokers we will not comment on the direction of rates. We can merely observe past trends and look at strategies to reduce risk. A conversation.
Many of you may be thinking why would we even be taking about risk and interest rate rises now. Well the reason is when rates are on the rise trying to lock in a fixed rate that makes sense is almost impossible.
Almost every article you will read on fixed versus variable rates will come to the same conclusion. That is, over the long term fixed rates will be more expensive for two reasons:
1) Fixed rates are usually higher than variable rate by about .75% to 1%
2) It is very hard to pick a time where fixing is better
If we look at point two it is pretty clear to see why. People react rather than plan. Then sometimes people act out of fear and fix at whatever is on offer at the time.
Right now is a unique time. Fixed rates are not higher and in some cases lower than variable rates. Knowing how long the variable rates will stay low will answer part two for you.
Lets look at the reasons people don’t like fixed rate loans:
- No offset accounts
- Can’t pay back extra if you want to
- Early repayment fees
- Break cost
Lets look at new world fixed rate loans ( you won’t find these at a big four bank right now but time will tell):
- Offset accounts to reduce the overall interest expense
- Pay up to 20k extra a year without penalty
- 5 yrs and 3 yr fixed rates around the same price as variable rates
- Redraw and ATM access
Who are fixed rates most suited to:
- People who can’t afford to pay extra off their loan if rates go up
- People who are unlikely to sell their home in the fixed rate period
- People with one or more properties who need certainty
- People who need sleep at night security
What do we now about interest rates. Well the reserve bank uses rates a little like the brakes and the accelerator of our economy. When things need to be stimulated rates are reduced and when the economy is hot and there are concerns over inflation the reserve bank will increase the cash rate which in turn effects bank rates. We are over simplifying but generally these are the mechanisms at work.
History also shows us that rates fall slowing and rise quickly.
If you are building a property portfolio then is it time to be more like a business and act rather than react. So if you are financing your entire portfolio or just doing a simple granny flat home loan then acting a little more like a business and looking at risk (having the conversation with your broker) won’t be the silliest thing you could do.