Hi, I was thinking about fixing my home loan for 15 yrs because I have never seen them this low before. I would appreciate any advise for the pros and cons of doing this. Thankyou, Jason
15 Year Fixed Mortgage
- Thread starter megsaletta
- Start date
15 years is a very long time. Without knowing the rate and lender it's a little tough giving an accurate list of the pros and cons.
Some things to think about though would be.....
* Will the fixed rates fall further this year? If so is it worth waiting a little?
* Should you wish to sell the property, refinance the loan or pay it off within the 15 year period you maybe stuck with break costs.
* Lender policies are changing more than ever at present. You may not think that refinancing would be an issue at present but let's say you had taken out a long term fixed rate with say ANZ a year ago (forget about what's happened with rates) and you needed to access as much equity out of your property as possible. ANZ used to go up to 95% with LMI capitalised. They now will do 90% with no capitilisation. That may make the difference between getting your next IP or not.
* Inability of having a full off-set account (partial ones aren't worth it IMO)
*lack of flexability with making extra repayments should you require it (depends on lender)
In favour of fixing for such a period would be the lack of availability of cheaper/equivelant rates over the term to that you fixed at.
Just some food for though
Regards
Steve
Hiya
What Steve said
Quick point of note, back in 2002 we managed to get quite a few 5 yr fixed rates in the early 6s and just below 6, so the current fixed rates arent quite as historically low as the variables.
This is because variable and fixed have different pricing mechanisms.
ta
rolf
What Steve said
Quick point of note, back in 2002 we managed to get quite a few 5 yr fixed rates in the early 6s and just below 6, so the current fixed rates arent quite as historically low as the variables.
This is because variable and fixed have different pricing mechanisms.
ta
rolf
As Rolf said.
My daughter bought a PPOR in 2003 and fixed for 5 years at 6.4%. Came off fixed last August and was encouraged to fix again but we persuaded her not to. She is watching the fixed rates now, but they are no cheaper than they were back in 2003. We were hoping for 5 year rates of 5% or close, but I don't think this is going to happen.
Marg
My daughter bought a PPOR in 2003 and fixed for 5 years at 6.4%. Came off fixed last August and was encouraged to fix again but we persuaded her not to. She is watching the fixed rates now, but they are no cheaper than they were back in 2003. We were hoping for 5 year rates of 5% or close, but I don't think this is going to happen.
Marg
The current 15 year rate with CBA is 6.99%
Do you think it will come down to 6%
http://www.commbank.com.au/personal/home-loans/fixed-rate/rates-fees/default.aspx
Do you think it will come down to 6%
http://www.commbank.com.au/personal/home-loans/fixed-rate/rates-fees/default.aspx
Steve, in the context that we're at the low end of rates (yes I realise there may be another 1% left to go etc) - can I ask how common this is amongst banks if the fixed rate your on is lower than the current variable rate at the time you sell/refinance?
I've done it in the past without penalty, and also checked the same policy applies recently as I'm debating when to fix rates as well. Apart from say some standard set fees for unfixing, if the rate you're moving to is higher than the fixed rate you're on - will there actually be any penalties from the banks?
I'm with CBA by the way. So I'm assuming each bank would have their own policy. Just thinking that this issue isn't as prevelant on this end of the cycle as it is when you're locking at higher rates and facing decreasing variable rates?
Ypu are partially correct in what you say although it's not linked to their current variable rate. Here's a basic method that the CBA use:-
repayment Date 22 Oct 08
Remaining Terms (RT) years 0.7
Prepayment Amount $307,857
Economic Loss Calculation
Cost of Funds (at the time of funding) 6.3%
Current Cost of Funds (Remaining term of fixed rate) 5.0%
Variance Cost of Funds 1.3%
Calculated Break Cost $2,800
ERA Calculator
Customer Interest Rate 6.9%
Variance of Interest Rate (same as cost of fund variance) 1.3%
Reinvestment Rate (interpolated interest rate to recover economic break cost) 5.6%
ERA calculator Break Cost $2,800
$307,857 x 0.7
Years x 1.3%
= $2,800
$307,857 x 0.7
Years x 1.3%
= $2,800
6.3% - 5.0%
= 1.3%
6.9% - 1.3%
= 5.6%
For memory they also have a $50 admin fee for this. Should the CBA's cost of fund be lower that above your rate then you would be OK with the break costs as they can lend the money out at a higher rate.
I was using the point you highlighted as a possible con and something a client should take into account.
Regards
Steve
Regards
Steve
On a separate note when i left the UK in 1992 Bear Stearns were offering 25 Year fixed rate mortgages at 8.99%.
When you consider some 17 years later the Bank of England rate is 1% and with a rate tracker loan you are paying not much more than that there is a big difference.
The BS product did not allow any extra repayments as monthly payments are the norm in the UK.
Think long and hard before you lock in for that level of time.
When you consider some 17 years later the Bank of England rate is 1% and with a rate tracker loan you are paying not much more than that there is a big difference.
The BS product did not allow any extra repayments as monthly payments are the norm in the UK.
Think long and hard before you lock in for that level of time.
i would say, if you WANT to fix, then maybe look at 3 years, 5 tops.
i would futher add, you SHOULD only do this if you are CF+, or can't afford rates to go any higher and are worried about losing your IP/home.
my 2c. hope it helps.
cheers.
i would futher add, you SHOULD only do this if you are CF+, or can't afford rates to go any higher and are worried about losing your IP/home.
my 2c. hope it helps.
cheers.
I respectfully disagree.
I think your primary objective when choosing the length of the fixed loan should be an analysis of why you purchased the property in the first place.
If you have purchased the property as a straight buy and hold, and you plan on holding the property forever then you should try to fix for as long as possible. Especially when we are in a historically low interest rate environment.
If you have purchased with a view to subdivision/building additional properties on the site etc, then it could be argued that a shorter duration fixed rate is suitable.
Dont forget the fixed rate is against the original loan balance. Hence over time both the debt and interest component should decrease over time against the value and rents of the underlying property. However within the first cycle of a property's pricing, interest rates will comprise a very large % of total rent. (This becomes a smaller % as the property moves through consecutive cycles). Given that an average cycle is 5-8 years it makes prudent sense to fix for a period greater than 8 years.
I fail to understand why investors fix for short term periods of 3 years or less on a buy and hold property as a insurance play. If interest rates move against you, those three years will be insufficient to create sufficient buffers on rent and equity. However over 10years, the natural long term increase in rents and equity should provide high levels of insurance if you come out of the fix into a adverse interest rate environment.
Remember the whole point of fixing is to create an insurance buffer.
I think your primary objective when choosing the length of the fixed loan should be an analysis of why you purchased the property in the first place.
If you have purchased the property as a straight buy and hold, and you plan on holding the property forever then you should try to fix for as long as possible. Especially when we are in a historically low interest rate environment.
If you have purchased with a view to subdivision/building additional properties on the site etc, then it could be argued that a shorter duration fixed rate is suitable.
Dont forget the fixed rate is against the original loan balance. Hence over time both the debt and interest component should decrease over time against the value and rents of the underlying property. However within the first cycle of a property's pricing, interest rates will comprise a very large % of total rent. (This becomes a smaller % as the property moves through consecutive cycles). Given that an average cycle is 5-8 years it makes prudent sense to fix for a period greater than 8 years.
I fail to understand why investors fix for short term periods of 3 years or less on a buy and hold property as a insurance play. If interest rates move against you, those three years will be insufficient to create sufficient buffers on rent and equity. However over 10years, the natural long term increase in rents and equity should provide high levels of insurance if you come out of the fix into a adverse interest rate environment.
Remember the whole point of fixing is to create an insurance buffer.
What were you doing 15 years ago?
15 years ago could you have planned for what your twists and turns your life has taken?
IMHO its just too long - its probably just under a quarter of the total life span of your average male.
Then dont fix, stick with variable, just dont kid yourself that by fixing for a short duration, you are creating adequate insurance against adverse movements in interest rates.
I know what many people are thinking: either
1) they will see the trend of upwards movements in interest rates and will have time to act accordingly; or
2) that if interest rates do go up, they will only stay up for a short period of time before they drop to bearable levels again.
In most cases this will be true. But the truth is we just dont know the future. What would happen if we went through a sustained period of high inflation like the 1970's and 80's. What happens if credit remains tight for a long period of time forcing credible interest spreads on borrowing rates?
Usually its some unknown factor (the black swan effect) that nobody is expecting that causes so much pain.
For me i prefer to insure against this risk, especially when the cost of insurance is so reasonable. If it doesnt eventuate then all ive lost is a couple of percentage points in additional interest rate expense (which doesnt hurt me, because i only invest in the first place when i can achieve at least a cash flow neautral position with a long term fixed loan), however if it does eventuate then at least i am protected and its one less thing i have to worry about.
My whole investment philosophy is based on risk vs return. The better i can hedge risk, the more aggressive i can be with my investments.
There was recently a very good investment for those with serious money that involved oil arbitrage. Basically the difference between the oil spot price and the 1 year futures price was so large, that you could arbitrage a nearly risk free return. Basically you would buy 1 year oil futures, buy oil on the spot price, higher a tanker with a crew, park the oil in the tanker for a year, insure the lot and make physical delivery in one years time, all for an upfront known profit.
Chilli when banks give you a fixed rate they win and you lose 19 out of 20. The other 1 time the bank doesn't lose either because they bundle the loans together on sell them off to speculators
As a property investor fixing for 15 years would narrow your options not expand them and that is coming from someone who believes in buying and where possible never selling.
I dont see contango as particularly relevant.
You can't hedge against divorce. You catch your wife / husband in bed with your best friend, file papers and the court orders the sale of all the family assets.
Or maybe your daughter wins the Australian gymnastics competition and you suddenly decide you need to fund her olympic dreams because money doesn't matter any more.
Or maybe IRs get stuck under 1 percent like Japan for 20 years.
I could make up scenarios all day. The point is that long term fixing stops becoming a mitigant and becomes a risk factor itself if you stretch it out far enough.
You can't hedge against divorce. You catch your wife / husband in bed with your best friend, file papers and the court orders the sale of all the family assets.
Or maybe your daughter wins the Australian gymnastics competition and you suddenly decide you need to fund her olympic dreams because money doesn't matter any more.
Or maybe IRs get stuck under 1 percent like Japan for 20 years.
I could make up scenarios all day. The point is that long term fixing stops becoming a mitigant and becomes a risk factor itself if you stretch it out far enough.
Im sorry maybe i am missing something, but why does it limit my options.
If i wish to refinance, i can get a second loan against the property by the same lending institutions, so just by fixing doesnt prevent me from refinancing. ( I guess if you were a lo-doc borrower you might also have the risk of the financer not wanting to issue you with additonal loans on that property and you couldnt go to alternative lenders because of the fixed loan component)
The only major downside i can see is disposal of the property. If i wish to dispose of the property i have the risk of paying out the differential in interest costs from movement in the fixed rates. But even this factor diminishes with time.
I agree most of the time you wont need it, its just like insurance, most of the time you dont need it, but also like insurance, its when a real problem comes up, that if you dont have insurance you can find yourself in real trouble.
Given the choice between potentially loosing my property portfolio, and having to bear a slighly higher interest rate i prefer the higher interest rate.
Another factor that people might not have taken into account, before the recent interest rate cuts, long term fixed rates where very competitive because of easy lending practices. Now this is just a maybe, but if spreads become more risk averse in the future, then you could find yourself paying significantly higher fixed rates in the future. For example we have interest rates at 3.25% but the 10 year fixed rate is around 7.8%. I find this interesting because i managed to obtain 10 year fixed rates at 7.18% in 2007 when interest rates were around 6.5%+.
So if we move into a more risk adverse climate, then what happens when RBA rates move to say a more neutral 5%. Could the 10yr fixed rate then move to around 9%?????
Just as people might start looking at that situation because of rising interest rates, it would be priced out of their ability.
If i wish to refinance, i can get a second loan against the property by the same lending institutions, so just by fixing doesnt prevent me from refinancing. ( I guess if you were a lo-doc borrower you might also have the risk of the financer not wanting to issue you with additonal loans on that property and you couldnt go to alternative lenders because of the fixed loan component)
The only major downside i can see is disposal of the property. If i wish to dispose of the property i have the risk of paying out the differential in interest costs from movement in the fixed rates. But even this factor diminishes with time.
I agree most of the time you wont need it, its just like insurance, most of the time you dont need it, but also like insurance, its when a real problem comes up, that if you dont have insurance you can find yourself in real trouble.
Given the choice between potentially loosing my property portfolio, and having to bear a slighly higher interest rate i prefer the higher interest rate.
Another factor that people might not have taken into account, before the recent interest rate cuts, long term fixed rates where very competitive because of easy lending practices. Now this is just a maybe, but if spreads become more risk averse in the future, then you could find yourself paying significantly higher fixed rates in the future. For example we have interest rates at 3.25% but the 10 year fixed rate is around 7.8%. I find this interesting because i managed to obtain 10 year fixed rates at 7.18% in 2007 when interest rates were around 6.5%+.
So if we move into a more risk adverse climate, then what happens when RBA rates move to say a more neutral 5%. Could the 10yr fixed rate then move to around 9%?????
Just as people might start looking at that situation because of rising interest rates, it would be priced out of their ability.
