5 year fixed rates thread

[MichaelW]

Hey, but if I am wrong, bring on another property price surge.

Great isn't it!

That's where my thinking is at. Stay variable and its a win/win.

i.e. The economy stays flat (as I predict) and you win on your mortgage rate versus fixing at a 150bp premium. OR The economy recovers quickly back into boom territory (which I doubt) and you win on your capital appreciation!

Fixing runs the risk of a lose/lose. i.e. the economy stays flat and you pay too much for your mortgage rate versus the variable and you still have no capital gains to boast about.

Variable for me.

Cheers,
Michael

 

[devo76]

Is anyone doing the 50/50 fixed variable loan. This to me seems like a good move if you want some certainty and feel you have missed the boat. And when you take into consideration the .7 % package discount for variable on westpac loans. This would mean the current variable would have to climb to around 7.69 before you start to make a lose. ( Thats if you were going to fix for 5 years )

 

[syahrr01]

The economy recovers quickly back into boom territory (which I doubt) and you win on your capital appreciation!

I think I'm missing something.

Taking your scenario, say we follow the yield curve and interest rate rises dramatically to historical average of 7% and house prices somehow surge. How would anyone lose capital gain by fixing at 6%?

 

[Aaron Sice]

if prices AND IR's don;t move - then you lose!

all the pro-variable talk assumes the banks won't raise rates independantly of the RBA.

we've seen a dangerous precendent. banks will strangle a country if they're allowed, and currently, there's no legislation to stop them.

 

[MichaelW]

I think I'm missing something.

Taking your scenario, say we follow the yield curve and interest rate rises dramatically to historical average of 7% and house prices somehow surge. How would anyone lose capital gain by fixing at 6%?

They wouldn't. That's the win/win scenario for the rate lockers. i.e. High interest rates and a booming economy driving capital appreciation.

If I stay variable then I either get win/lose or lose/win, at least I win on one of either capital gain OR low variable interest rates.

If I lock then I either get win/win or lose/lose. In the scenario above its win/win, but if the economy stays flat for the forseeable future then you run the risk of lose/lose. i.e. paying too much for your mortgage rate and not seeing any capital appreciation upside.

I'll hedge and take a bet each way by staying variable. At least that way I'm guaranteed to win one way or the other.

Cheers,
Michael

 

[Electro]

Interesting way of looking at it Michael.

I guess that its better to 'win' now (lower rates) and maybe later (higher CG) then speculate on whether the economy will boom again soon (if not for a long while) and/or rates skyrocket within the next couple of years.

 

[Bluegoose]

I agree a 150bp premium is too much to gamble on.

But how about a 79bp premium on current variable for a fixed 3 year period. More reasonable??.

I'm not a fan of 3 year fixed rates simple because it is likely I will come out in the middle of the cycle, however the premium seems reasonable, it gives some certainty and if rates do head up in 1-2 years time then it gives me time to get things sorted.

I got the option to lock in about a third of my borrowings today at 5.89% for 3 years I/O. No obligation on my part but I do need to confirm within 2 weeks. 3 years at 5.89% seems like a reasonable hedge given current info.

 

[Witzl]

to be honest i dont care if i end up paying more in the 3yr fixed rate against staying variable. This is a risk management strategy for me!!

My fiancee and I have stretched to our $1million portfolio (two ips and a PPOR), and we want to hang onto that! Fixing the rates mitigates the risk of rates climbing and forcing us to sell, and we can afford the rates we've fixed at.

So yeah... not worth the gamble for us.

 

[steveadl]

That's the route I took with most of my resi debt Bluegoose - fixed for 3yrs at the bottom of the cycle on 5.6% (was .66% above my variable rate at the time). Relatively little difference in interest amounts and I have my certainty in payments for the next 3yrs.

 

[Aaron Sice]

to be honest i dont care if i end up paying more in the 3yr fixed rate against staying variable. This is a risk management strategy for me!!

My fiancee and I have stretched to our $1million portfolio (two ips and a PPOR), and we want to hang onto that! Fixing the rates mitigates the risk of rates climbing and forcing us to sell, and we can afford the rates we've fixed at.

So yeah... not worth the gamble for us.

then that is smart investing and i like it

 

[Bluegoose]

Witzl and Steavdl,

You 2 have just summed up nicely why I am likely to take my option to fix for 3 years.

A) Minimises the risk of upward movements in rates as I owe the banks well over a mil now and need to think about risk minimisation on at least part of my borrowings (looking to lock in $500K as my other banks fixed rates are terrible)

B) Minimal downside risk in locking in at 5.89% for 3 years. I can't see how I can lose by paying only 0.78% premium to current variable rate. Even if I lose I don't really lose as the difference will be bugger all.
However, if I were to lock in for 5 years at 6.49% - I could lose significantly or I could win significantly. I'm not really in the mood to take that big a punt but the 3 year option seems like a good little punt.

 

[steveadl]

However, if I were to lock in for 5 years at 6.49% - I could lose significantly or I could win significantly. I'm not really in the mood to take that big a punt but the 3 year option seems like a good little punt.

Spot on, the 5yr rate has seen it's cheapest level as well, but I wasn't prepared to pay that much extra for the 2yrs. I'm not necessarily trying to beat the rate spread over the term (although that will be a nice bonus if it turns out I've called it right), but couldn't see the 5yr term being a good choice.

 

[Strannik]

Witzl and Steavdl,

You 2 have just summed up nicely why I am likely to take my option to fix for 3 years.

A) Minimises the risk of upward movements in rates as I owe the banks well over a mil now and need to think about risk minimisation on at least part of my borrowings (looking to lock in $500K as my other banks fixed rates are terrible)

i think in current climate it doesn't make sense to fix for 3 years
you will either end up coming off fixed period in the middle of high interest rates (which is what you are trying to avoid?) or it won't move much within 3 years in which case you lose money

B) Minimal downside risk in locking in at 5.89% for 3 years. I can't see how I can lose by paying only 0.78% premium to current variable rate.

simple
if the rates don't move you will lose 3900/year on a 500k loan

 

[redwing]

if prices AND IR's don;t move - then you lose!all the pro-variable talk assumes the banks won't raise rates independantly of the RBA.

we've seen a dangerous precendent. banks will strangle a country if they're allowed, and currently, there's no legislation to stop them.

Lost me there BC

If Prices (Cap Growth) doesn't head North AND Interest Rates don't move (all stays as is, i.e. current low variable rates) - then you lose

How

 

[Electro]

Lost me there BC

If Prices (Cap Growth) doesn't head North AND Interest Rates don't move (all stays as is, i.e. current low variable rates) - then you lose

How

I think BC meant that if you fixed at the higher than variable rate and the above conditions occur you lose. Not if you remain on variable.

 

[Aaron Sice]

yah yah spot on electro.

 

[auror]

Great isn't it!

That's where my thinking is at. Stay variable and its a win/win.

i.e. The economy stays flat (as I predict) and you win on your mortgage rate versus fixing at a 150bp premium. OR The economy recovers quickly back into boom territory (which I doubt) and you win on your capital appreciation!

Fixing runs the risk of a lose/lose. i.e. the economy stays flat and you pay too much for your mortgage rate versus the variable and you still have no capital gains to boast about.

Variable for me.

Cheers,
Michael

I sincerely hope you're right, michael, as I've missed the fixed rate boat...

 

[JIT]

Hi there,

Just for the record, for the bottom pickers here...

I think it was Rixter who predicted the fixed rate sweet spot to be just after easter.

I made my bottom call on this thread 2 April.

Bottom would seem to have occurred around 14 April (see keithj's Fix Now or Wait? thread).

And keithj's analysis appears to be correct thus far.

If the SFE is right, then in 12 months the SVR may go from around 5% to 6.5%...assuming banks don't increase above and beyond the RBA...what are the chances of that happening??

(SFE could also be wrong)

5 years fixed at 6 - 7% today would seem not unreasonable if this is the case.

For me, after failing to succeed in a re-fi to St. George (and CBA and WBC...damn credit crisis!), I only had one loan that I could fix and it was unfortunately with Bankwest, which lead the fixed rate rises (and falls) and I missed that boat early on, and their 4-5 year rates today (when I was going to fix at 6.59% for 4 years) are now above 7%...oh well!

So I'll stay on variable across my portfolio (with 2 fixed loans coming off in Nov), but not an ideal outcome for me.

But I have loans across 3 major banks at 1/3rd of total borrowings with each, so I have some diversification and flexibility at play at least to mitigate some of the risk...

I might fix later in the cycle eg. for 12 months if things get a bit dicey.

My JOB/business income is likely to double in the next 6 months so I'm not too concerned overall.

For others who missed the fixed rate boat, just think of the people fixed for 5 years at 8%!

 

[oc1]

For others who missed the fixed rate boat, just think of the people fixed for 5 years at 8%!

Or at 9%

Managed to get all but one unfixed and with no major penalty.

Luckily the other loans break out costs have reduced dramatically in the last 2 months

 

[AshleyS]

I struggled with which way to go.... In the end, I decided to put an extra 2% of my loan balance away from 2 months ago. Yes it's another $20K a year but if the interest rates stay down for a while, then i'm hoping I will be infront in the end