5 year fixed rates thread

[Les]

G'day again,

A year ago, the best brains in Australia could not forecast what is happening to our economy at the moment. If you are able to forecast what is going to happen over the next five years, you're just plain lucky!!

Hehe - first off, I had to have a giggle at "the best brains in Australia" comment. In short, the RBA cost me HUGELY by chasing the "inflation demon", while blind Freddy could tell them that things were on a meltdown. (Now known as the "Global Financial Crisis"). And don't get me started about ......... (Hmm - time for ME to have a cold shower, instead of that "other bloke"....)

And, no, I'm not attempting to forecast what the next 5 years might hold (as I've not seen anything like this before )

All I am saying is that "the time to Fix a loan is NOT when Interest Rates are high" - this plays right into the hands of "the Banks". I'm saying NOW is the time to "watch Fixed rates like a hawk" and be prepared to FIX....

Hey, maybe I might be early, and I get to lock in a 6% rate for the next 5 years (damn!!) or maybe, I might hang on and get 5.5%...... In either case, I don't mind overly - as it sure beats the hell out of paying 9% in three years time.

In short, FIXED is fine - at the RIGHT end of the cycle,

Regards,

 

[chilliaa]

don't confuse mystery woth intelligence. You are talking about the same people that lead us into the current financial mess we are in. Look at MBLs share price to give an insight into their greatness

Of course they can beat the general public in regards to pricing of fixed loans, if they couldnt they wouldnt offer fixed loans

The causes of the global financial crisis is much more complicated that creating retail fixed loans.

 

[chilliaa]

your saying the banks can out smart the general public, yet they have managed to crash the world economy and half of them have suicided in the process. Their business is like a green grocer... buy some stuff, add a margin and find a customer that can pay you

Except when you start to believe your own bull*&%^
And even worse because you are greedy you hold your own bull*%&^ on your balance sheet.

 

[chilliaa]

G'day again,


Hehe - first off, I had to have a giggle at "the best brains in Australia" comment. In short, the RBA cost me HUGELY by chasing the "inflation demon", while blind Freddy could tell them that things were on a meltdown. Really then how come on this forum things only started to become really gloomy after mid 2008, the financial crisis started around July 2007, yet if you look at the coffee lounge forum on when is the all ords going to hit 6000, the BHP thread etc, people were still feeling pretty happy with things, the global financial crisis was solely an american problem.(Now known as the "Global Financial Crisis"). And don't get me started about ......... (Hmm - time for ME to have a cold shower, instead of that "other bloke"....)

And, no, I'm not attempting to forecast what the next 5 years might hold (as I've not seen anything like this before )

All I am saying is that "the time to Fix a loan is NOT when Interest Rates are high" - this plays right into the hands of "the Banks".and how do we know that interest rates wouldnt have gone higher, what alternative could i have used as insurance against this risk to prevent me loosing my property portfolio I'm saying NOW is the time to "watch Fixed rates like a hawk" and be prepared to FIX....
this time around i dont think longer term discounted fixed rates are going to be easy to get for the following reasons:
1) bank long term funding costs are higher, by the time funding costs drop through the removal of market fear, the RBA will be increasing rates again.
2) removal of the securitisation market, which faciliated foreign competition in the issuance of australian loans
3) exiting of foreign banks and the increased market dominance of the australian big 4 banks, hence higher bank margins are back on the agenda after 10yrs of margin erosion
Hey, maybe I might be early, and I get to lock in a 6% rate for the next 5 years (damn!!) or maybe, I might hang on and get 5.5%...... In either case, I don't mind overly - as it sure beats the hell out of paying 9% in three years time.

In short, FIXED is fine - at the RIGHT end of the cycle,

Regards,

Personally i think people should stop looking at fixed rates as a way to 'beat the system'. Fixed rates should be used as insurance to preserve your property holdings. Like any insurance policy, you dont expect to profit from it, instead its their to mitigate your risk profile.

Lez my appoligies due to your position as a Super Moderator, if i sound abrupt, but i really think its dangerous to use fixed loans as a means of speculation rather than insurance. What would happen if the RBA is 'wrong' again, inflation starts jumping to 5%+ and starts ratcheting up interest rates again. Those people who were financially incapable of paying higher interest rates, but were staying on variable in the hope of 'beating the bank' could find themselves in serious trouble.

I am not saying this will occur, in fact i think the near term probability of it occuring is quite low, i just want to emphasise that the purpose of fixing a loan is for insurance, not to make profit.

 

[Nth Brisbanite]

Fixed rates should be used as insurance to preserve your property holdings. Like any insurance policy, you dont expect to profit from it, instead its their to mitigate your risk profile.

Chilliaa, please explain how fixed rates can be used as insurance to preserve your property holdings.

 

[GoAnna!]

Chilliaa, please explain how fixed rates can be used as insurance to preserve your property holdings.

I use fixed as insurance.

Say you borrow 5 million.

At 6% you are positive

At 6.5 % you are neutral

At 7% you are negative

At 8% you are borrowing heavily to cover the shortfall.

At 9% you are forced to sell properties.

If you can fix in at no more than 6.5% interest rate long term you are locking in a self sustaining or positive cashflow portfolio. This means you know with certainty that you can hold for the period of the fixed rates. All going well rents are also increasing (and perhaps debt reducing) and so when you come out the fixed loans your position is even more solid.

Sure you might be missing out on 5% rates but it might also rise to 9% and your portfolio collapses.

Sure variable interest rates MAY leave you better off over time but will they force you to the wall in the short or medium term? At 5 million borrowings, (and $50K increase in repayments each 1% interest rate rise) you won't be able to cover the shortfall by tightening your belt. Your strategy relies on the portfolio being self sustaining.

PS Ooops my name is not Chilliaa

 

[Dazz]

Only a large, experienced investor who is swimming in and amongst the risks and opportunities their portfolio exhibits would have been able to have written that. Well done Goanna. You are obviously a long way down the right track.

When troubled times occur, "tightening the belt" on private expenses no longer is relevant, cos the ship is too large at that stage. You'd end up looking like a barbie doll, with a size minus 6 waist. Other tactics need to be employed.

 

[Les]

G'day Chilliaa,

while blind Freddy could tell them that things were on a meltdown.

Really then how come on this forum things only started to become really gloomy after mid 2008, the financial crisis started around July 2007

I can't answer for the forum. All I can say, is that things (for me) became serious after Mar 08. First, a few facts (with comment from me)

RBA increases
Aug 06 - increase 0.25% to 6% cash rate
Nov 06 - increase 0.25% to 6.25% cash rate
Aug 07 - increase 0.25% to 6.5% cash rate (first signs of GFC taking shape)
Nov 07 - increase 0.25% to 6.75% cash rate (during an election - a first?)
Feb 08 - increase 0.25% to 7.00% cash rate (why? every other Western country was dropping theirs !!) Banks also starting raising THEIR rates, over and above the RBA increase.
Mar 08 - increase 0.25% to 7.25% cash rate (and Banks continued raising theirs - above the RBA level)

Through most of 06, then 07, the RBA kept its cool - what astounded me was that they raised rates in Aug 07, didn't even "wait to see the effect" and raised them again in Nov 07 (then Feb, and Mar). How much Kevin Rudd's "inflation genie is out of the bottle" comments might have impacted on the RBA, I don't know. They wouldn't have helped though....

In short, I did hear that Sydney's "repossession rate" DOUBLED in 2008 - all those poor kids who'd bought a house became the victims of the RBA and the Banks with their UNNECESSARY raising of rates in late 07, early 08. As for me, my situation became a bit alarming after Mar 08 (when some Fixed Rates - 6.49% - suddenly became 9%+). And hey, that is NOT a 2.5% increase - for me, it was a 39% increase!

So, OK, it hurt !! But I also knew (and this is what I was trying to get across to others) that Interest Rates HAD to come down. With the world going into "meltdown", there is NO WAY they could go any other way. If I'd felt I HAD to Fix, with Rates high, it would have been 1 year maximum.

Now, with a bit of sanity returning, the Rates have dropped like a stone - and it is looking like the right time to Fix (can't be far away). My costs have returned to less than 2005 levels - and, yes, I'm happy about that.

Personally i think people should stop looking at fixed rates as a way to 'beat the system'. Fixed rates should be used as insurance to preserve your property holdings.

Preserving what I have is all I'm about, Chilliaa - but fixing at the wrong time is not going to help me, or you. All I'm about here, is to focus on WHEN is a good time to Fix. No more, no less.

Lez my appoligies due to your position as a Super Moderator, if i sound abrupt, but i really think its dangerous to use fixed loans as a means of speculation rather than insurance.

Chilliaa, me being a Mod is not an issue - to me, I'm just another poster with an opinion, as are you. And, if I thought I was using Fixed Loans to "speculate", I'd probably agree with you.

In essence, I have heard SO many stories of people bemoaning the fact that they Fixed when rates were high. I simply wanted to alert others that we are entering "the time" when Fixing rates can work well. But, even that is open to discussion.....

Regards,

 

[csc]

like it or nor fixed long termers of 5-10 years have their place in the market.

it give punters;

1. peace of mind

2. peace of mind

3. peace of mind

cant do better than that.

 

[chilliaa]

Ok thanks Lez,
maybe i misread the tone of your message, i just get very nervous when people talk about fixing as a means of trying to beat the market.

 

[chilliaa]

haha GoAnna, you answered it better than i would have anyway

 

[Rixter]

PS Ooops my name is not Chilliaa

GA, great reply - well said! This is my philosophy also, having just refixed.

Fixing rates is purely an insurance tool. Its not about rates increasing or decreasing!

As TPFKAD has already stated, it's the findings of an experienced investor.

Once again great reply and kudo's to you.

 

[Nth Brisbanite]

I use fixed as insurance.

Sure you might be missing out on 5% rates but it might also rise to 9% and your portfolio collapses.

Sure variable interest rates MAY leave you better off over time but will they force you to the wall in the short or medium term? At 5 million borrowings, (and $50K increase in repayments each 1% interest rate rise) you won't be able to cover the shortfall by tightening your belt. Your strategy relies on the portfolio being self sustaining.

PS Ooops my name is not Chilliaa

Well done and thanks GoAnna for the time that you put in the explanation. Your example helped me to understand a lot about what Chilliaa was getting at.

This is a great forum. I continue to learn so much about the "mystery" of property investment.

 

[GoAnna!]

Thanks for the positive feedback. It's a topic I feel passionate about and it frustrates me when people dismiss fixed rates with "you can't beat the banks"

Sometimes when we read advice on this forum it's easy to forget that each of us are coming from very different situationsand riding the variable rates when you borrow say $200K is VERY different from riding variable rates at $5 million. A 3% rise at $200K is $6K which many could finance out of a salary income with some budget tightening. A $150K increase (3% of 5 million) is a whole different drama.

So apparently contradictary advice may actually be correct for different situations.

So the advice is as good as it is true for your own personal situation.

 

[Les]

G'day Goanna,

Sometimes when we read advice on this forum it's easy to forget that each of us are coming from very different situations and riding the variable rates when you borrow say $200K is VERY different from riding variable rates at $5 million

That was SO well said - and, yes, it is all relative to each individual situation for sure.

Regards,

 

[BillC]

I have fixed all my ips at 4.99% with Westpac not 5 years but 3 years

I am happy with that for these reasons

I am retired and need to look at my portfolio in 3 years maybe to sell one or refinance etc

I have fantastic cashflow now as I have owned my properties for a long time

I recomend looking at each ip work out your outgoings(Rates,Body Corp etc)
Work out rent and look at the best fixed rate you can get
If you become positive or even neutral seriously consider fixing your rates

During these uncertain times at least you wont stress over ips

Cheers

 

[boomtown]

The ASX Interest Rate Expectation Curve seems to be moving up rapidly...

There are no longer any periods which start with a 1. Looks like expectations are bottoming at 2.35 with a June bottom. Last week the bottom was in August.

This needs to be watched carefully - its a shame that I dont know any way to chart the change in expectations.

http://www.asx.com.au/data/trt/ib_expectation_curve_graph.pdf

 

[House_Keeper]

Did anybody notice that 10 year treasury bond rates have risen significantly since mid january?

From a low of 3.86% in mid january, they have climbed to 4.37%.

The government stimulus announced this week is not only inflationary, but it also increases the supply of bonds, pushing up yields.

I take this as a sign that it is time to fix rates soon. While they may go down further, I see an increasingly greater risk that they will start climbing back.

This is just my opinion though, I am not bond trader.

Cheers,

 

[buzzlightyear]

The ASX Interest Rate Expectation Curve seems to be moving up rapidly...

There are no longer any periods which start with a 1. Looks like expectations are bottoming at 2.35 with a June bottom. Last week the bottom was in August.

This needs to be watched carefully - its a shame that I dont know any way to chart the change in expectations.

http://www.asx.com.au/data/trt/ib_expectation_curve_graph.pdf

Expectations went up after last interest rate rise too. As soon as there is some more bad news those expectations in rates will reduce again.

They seem to follow the market sentiment instead of being any leading indicator.

 

[sash]

I think this will bounce about a bit as government spend over the years is priced in.

From a low of 3.86% in mid january, they have climbed to 4.37%.

The government stimulus announced this week is not only inflationary, but it also increases the supply of bonds, pushing up yields.