5 year fixed rate under 5.00%

[Richard Feynman]

Not sure how good this guy is with his predictions but it makes for interesting reading

http://knowledgesource.com.au/what-do-the-banks-know-that-we-dont/#fromemail

If he's right, interest rates will drop further. Increases are unlikely as it will bring the Aus dollar up and this is not what the RBA wants.

Perhaps someone with a better understanding of macroeconomics can tell me if what he's saying is on the money?

I'm no expert, but he's not the only one making those types of comments. The high dollar affects demand for exports, unemployment is high, the mining sector is easing up and construction won't fill the entire hole being left and the RBA are jawboning (e.g. recent "better off to rent than buy" and "business owners should take more risks") to try and take some heat out of the market/stimulate the economy. The one big factor working against another cut is that inflation is right at the top of its target of 2-3%.

Looks like even money on another drop within a year but there are lots of factors in play.

 

[tobe]

Have a look through the 3 and 5 year fixed rate thread and see how close peoples predictions on here have been. It goes back quite a way now, and would make for interesting reading.

 

[Redom]

Interesting - thank you for sharing. I usually don't shy away from any asking for any macro interpretations, especially when it comes to developments in international credit markets

1. Banks main funding source is via deposits - around 50% and has been rising since the GFC (I suspect it has fallen back slowly since then). The cost of deposits change depending on maturity dates/liquidity of those funds. For example, transaction accounts don't pay interest, while term deposits get to around 4%. The costs of deposits have fallen significantly over the last year/two, 5+ basis points.

2. Banks reducing their fixed rates is a function of a fall in the COST OF FUNDS. It is NOT an expectation value of market interest rates over a 3-5 year period. This is a common misconception, and one the author of the article misunderstands. Anecdotally, as part of my previous role, I met with the BIG 4 + other chief forecasters (Oster, Evans, Richardson, etc) for the last 3 years - all have publically stated forecasts on interest rates - and none would have them FALLING significantly over the medium run. Evans WAS the most dovish, and he has shifted stance to IR increases in medium run.

3. Also, his assumption on market pricing of rate cuts is wrong I believe. I haven't checked latest info, but its available on Bloomberg daily and I'm quite confident in saying the market hasn't factored in 50bp cut over then next 12 months.

4. The RBA's concerns over the dollar do exist. But their ability to control/manipulate it is drastically overstated, largely as a result of misunderstandings from most Australians. People see the dollar and assume its some glorious reflection of the current state of the economy, forgetting that day to day, it is largely driven by relativities in interest rate differentials around the world - ALL outside our control. Sure, over the medium run it'll adjust to fundamentals (e.g. last May's 15% fall), but day to day, a much larger driver in movement is IR differentials.

5. His right about falls in swap rates. Price of credit in wholesale funding markets has fallen. This has started to feed through in the price of fixed rates. Others have commented on whats likely to happen. Note that this makes up a smaller portion of the COST OF FUNDS for banks, but is more directly related to fixed rates. This is because of maturity differences - deposits are generally more liquid, meaning theyre likely to underpin shorter term rates. Longer term rates sourced via international credit markets

6. Fixed rates are becoming a lot more popular in Australia. His static figure doesn't take into account that a few years back the numbers were sub 10%. Getting up to 20% is a very significant shift.

Haha that's all for now. As I said, love this stuff!

It is nonetheless, a very interesting article that generally does have the right idea.

Not sure how good this guy is with his predictions but it makes for interesting reading

http://knowledgesource.com.au/what-do-the-banks-know-that-we-dont/#fromemail

If he's right, interest rates will drop further. Increases are unlikely as it will bring the Aus dollar up and this is not what the RBA wants.

Perhaps someone with a better understanding of macroeconomics can tell me if what he's saying is on the money?

 

[Of The Vultures]

Thank you for the replies, especially Redom. Interesting point about the fixed rates not being any kind of expectation of future <5 year rates, seems counterintuitive, at least to an economic illiterate like me.

 

[Redom]

No problem Of the Vultures.

One way to think of it is a supermarket analogy. If farmers grow lots of tomatoes, and they reduce the cost of tomatoes to supermarkets, the lower costs are often passed onto consumers through cheaper tomatoes. The cost of future tomatoes doesn't matter in the pricing of todays tomatoes.

Same with credit. Banks are purchasing funding cheaper, and those costs are being passed on. Some of the credit they purchase are on longer maturities (3 years/5 years) - so that's why the price of it falls.

Relatively unrelated to expectations on interest rates.

Simplified example - but its a way to think about it.

 

[Buzz]

I put this quick 1.30 min video together just for my clients but it might give a simple summary of many of the considerations for those considering fixing which have already been shared in this long thread.

http://youtu.be/Za2wh_rq4zg

As others on this thread have noted there can be more complex considerations. However one way I have hedged some of my concerns over the years with my own portfolio is to split some of the lending I have which is with Adelaide Bank 50:50%, as they have an offset against the fixed as well. So depending on the rates I move my funds from one offset to the other. Having said that Adelaide 5yr fixed is still 5.34%pa but 3yr is 4.89%pa which is more palatable.(as of 3/8/2014)

Mind you I was one of those people who fixed at >8%pa for 3 years a few years ago (not with Adelaide Bank), 6 mths before rates dropped so sometimes you just roll with the punches, at the time it was a risk minimisation against an increase and it was only 10% of my lending but it hurt.

Hope this serves you
Jane Slack-Smith

PS I have been on SS for over 10 years and I don't post on this thread as I know there are many brokers who dedicate themselves to serving SS and they do an exceptional job. I only post when I think I have something extra that can add value.

 

[seank]

From CBA this morning.

As always fixed rates should be considered with caution due to potential break costs.

And for that reason I've never used fixed rates.

 

[C Stewart]

Thanks Redom, great post. Seems to be misconception from most folk on this.

From my understanding, most specialists talk about fixing loans as a structuring strategy, rather than a cost strategy.

Nonetheless, it is great to get an insight into how the market moves.

Cheers,
Stewart

No problem Of the Vultures.

One way to think of it is a supermarket analogy. If farmers grow lots of tomatoes, and they reduce the cost of tomatoes to supermarkets, the lower costs are often passed onto consumers through cheaper tomatoes. The cost of future tomatoes doesn't matter in the pricing of todays tomatoes.

Same with credit. Banks are purchasing funding cheaper, and those costs are being passed on. Some of the credit they purchase are on longer maturities (3 years/5 years) - so that's why the price of it falls.

Relatively unrelated to expectations on interest rates.

Simplified example - but its a way to think about it.

 

[Redom]

Yep definitely - as mentioned, fixed rates have break fees. For 5 year fixed rates, these fees can be quite high. It shouldn't only be an expectation calc on future interest rates, it should fit in with overall strategy.

Obviously that calc is a consideration - but not a be all end all.

 

[Freddie Mac]

Unemployment up again. Interest rates to be cut next month? This so called transition from the mining sector to other areas doesn't appear to be happening too well. Shouldn't we just look at the position of the country prior to the mining boom and assume it will be worse than then thanks to the massive amount of debt we've racked up on both a personal and a national level?

My call - 4%/5 year fixed rates next year

 

[Ausprop]

Unemployment up again. Interest rates to be cut next month? This so called transition from the mining sector to other areas doesn't appear to be happening too well. Shouldn't we just look at the position of the country prior to the mining boom and assume it will be worse than then thanks to the massive amount of debt we've racked up on both a personal and a national level?

My call - 4%/5 year fixed rates next year

having just read this:

http://www.businessspectator.com.au...l&utm_content=851954&utm_campaign=kgb&modapt=

fixing could be a dangerous game

 

[Redom]

Agree fixing on the basis of interest rate predictions may not be fruitful (its hard for the best economists to know which way rates are heading with any certainty).

Although jobless numbers isnt all gloom and doom, the headline figure looks bad but behind it is a rise in participation (good thing).

Plus, RBA + Treasury all expected jobless figures around 6.5% and that was budgeted into in figures.

 

[Redom]

Unemployment up again. Interest rates to be cut next month? This so called transition from the mining sector to other areas doesn't appear to be happening too well. Shouldn't we just look at the position of the country prior to the mining boom and assume it will be worse than then thanks to the massive amount of debt we've racked up on both a personal and a national level?

My call - 4%/5 year fixed rates next year

Interesting call on the fixed rates.

I highly doubt this will spark any action from the RBA next meeting - it was expected. Pretty sure the latest statement even makes reference to a rise in unemployment being forecasted.

I'd be surprised if they even shifted communication back down to easing bias next month.

Perhaps could have more medium term implications though.

 

[Marty McDonald]

Trend is your friend and the trend since 1995 is down down down with a few spikes up like between 2004-2008. A small event called a gfc just after that of course has kept rates low.

Currently can't see rates getting bank up to 8%-10% or higher for a looooooooooooooooong time. So many big loans being written at the moment. The economy becomes more and more rate sensitive.

 

[see_change]

I'm looking at locking a loan in for 5 years a under 5 % . Mainly to lock in rate and manage cash flow over that period .

Do any of the crystal ball gazers foresee a significant drop in 5 year rates below high 4 ?

Cliff

 

[Marty McDonald]

I'm looking at locking a loan in for 5 years a under 5 % . Mainly to lock in rate and manage cash flow over that period .

Do any of the crystal ball gazers foresee a significant drop in 5 year rates below high 4 ?

Cliff

Seems unlikely to me but also cant see rates going up either so I'm thinking maybe best to float

 

[see_change]

Seems unlikely to me but also cant see rates going up either so I'm thinking maybe best to float

My thinking is if it's unlikely to go lower and we have a five year rate at under five , why not fix .

On a 500k loan the difference between a 5 year fixed and a variable works out just over 1 k per year , which in the big picture is nothing . The potential upside increase surely has to be more than that , so I'm puzzled why everyone we talk to is suggesting stay variable . The gain isn't that big ......

3 year rates are more expensive than 5 years rates .

Cliff

 

[keithj]

My thinking is if it's unlikely to go lower and we have a five year rate at under five , why not fix .

Wouldn't you rather have a 6yr fixed rate under 5% ? If so, then stick with variable for a year & then fix at <5% for 5 yrs this time next year. I'd expect we'll get a bit of notice that fixed rates are going up.

 

[tobe]

what keith said.

When 3 year fixed last went to sub 5 there was a rush to fix. Those that did are half way through thier term and still out of the money.

 

[mrbleuu]

My only concern with this is, if the sub 5% rates are related to cheaper lending which is a "limited time/quantity" offer and not with RBA rates, then what is to say 5 year rates wont go up when this cheap borrowing runs out?