Same boat here mate. There is a benefit is defining your cash flow for 5 years; surprised the brokers are writing the idea off so quickly.
fix loan rate 5 years?
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Same boat here mate. There is a benefit is defining your cash flow for 5 years; surprised the brokers are writing the idea off so quickly.
I think this is a strange comment coming from a broker. What is the justification for this comment?
Everyone has an opinion on rates, but nothing is a given.
Plans can change. A lot can happen in five years.
This is the only reason that is valid and should be used to justify fixing rates in my opinion.
All valid points.
If you want to fix - and I'm with you there - why don't you shop around for a low rate (4 or 4.1) for 3 years and with the flexibility of being able to refinance/do an equity split even though it's fixed (I think my bank does this). In other words, shop around for a decent credit union or like-minded set-up. They should be offering you a SPECIAL deal to get you in - close to 4%!
Also, if you think the odds are high that rates will head north rather than south, breaking shouldn't pose a huge risk as the break fee should be less when you are going to a higher interest rate.
You basically need to find an institution that won't rip you off for breaking - just for the peace of mind - even if you never do it.
If you want to fix - and I'm with you there - why don't you shop around for a low rate (4 or 4.1) for 3 years and with the flexibility of being able to refinance/do an equity split even though it's fixed (I think my bank does this). In other words, shop around for a decent credit union or like-minded set-up. They should be offering you a SPECIAL deal to get you in - close to 4%!
Also, if you think the odds are high that rates will head north rather than south, breaking shouldn't pose a huge risk as the break fee should be less when you are going to a higher interest rate.
You basically need to find an institution that won't rip you off for breaking - just for the peace of mind - even if you never do it.
There's merits to fixing.
Not for everyone though. Circumstances change. What if you have an illness? What if you have a divorce? You need money, want to sell, but you're stuck.
Not for everyone though. Circumstances change. What if you have an illness? What if you have a divorce? You need money, want to sell, but you're stuck.
I will say something in your favour. The rates have never been lower. It's not like you will be fixing at a 7+% rate. I don't know how low they will go, but I imagine your break fee will be low should you need to break, because they take into account your rate and the current swap rate to determine the break fee.
I bought a commercial property in around 88 and the only bank that would lend to be was the commonwealth development bank .and they forced me to fix at 11 % for three years .
When rates went up to 18 I was happy ....
4 years and 9 months ago we fixed at 6 % for five years as no one expected rates to lower .
Swings and roundabouts
Cliff
When rates went up to 18 I was happy ....
4 years and 9 months ago we fixed at 6 % for five years as no one expected rates to lower .
Swings and roundabouts
Cliff
As a broker myself, I think it depends on your personal goals.
So if for example to pay it down asap and depending by how much, you could look at a split, part as fixed and part variable. If it's an IP then goals may differ. For example, buying an investment with interest only and having it fixed for tax purposes, or on the other hand having it paid down as equity for a second possible investment and so on.
For myself personally, I'd be interested in fixing my loan at this point for the full 5 years or maybe 3 and then review it at the end of that term going forward depending on the rates at that point. There are also some products that allow you to pay down a fixed loan with reasonable limits. But then again, that just works for me.
Also, the competition is very tight atm so there are a lot of great deals. I think refinancing at this point in time is something worth looking into!
So if for example to pay it down asap and depending by how much, you could look at a split, part as fixed and part variable. If it's an IP then goals may differ. For example, buying an investment with interest only and having it fixed for tax purposes, or on the other hand having it paid down as equity for a second possible investment and so on.
For myself personally, I'd be interested in fixing my loan at this point for the full 5 years or maybe 3 and then review it at the end of that term going forward depending on the rates at that point. There are also some products that allow you to pay down a fixed loan with reasonable limits. But then again, that just works for me.
Also, the competition is very tight atm so there are a lot of great deals. I think refinancing at this point in time is something worth looking into!
You are correct its a very strange comment since most brokers and bankers want to lock in customers to the bank and protect their own interests.
By fixing for such a long time you are limiting yourself to that lender so are snookered if you:
1. Get a crap valuation and need to refinance
2. Lender's policy has changed significantly and you need to refinance
3. Lender's servicing calc has changed significantly or your position has changed and you no longer service additional debt (assuming you want to do an equity release) with that lender so you need to refinance
4. You sell
5. You subdivide
If you are confident that non of the above will happen in the next 5 years then go nuts.
Also add to that equation that I have spoken to my clients over the last 12 months when rates have been going down and I have advised them not to fix simply because they think the rates are good. I remember when the rates got to 4.99% and thought "gee to old Westpac 4.99% is back so better jump on that one'.
Lets imagine you have property with a loan (loan A) with the bank, and then release equity on that property creating another loan (loan B).
If you fix Loan B (the equity loan), but loan A (the initial loan for the property) remains as variable are you still able to then request more equity on this property when it increases in value.
*** I note some people earlier commented that it was difficult to release equity when fixed...just want to clarify on the scenario detailed above. ***
If you fix Loan B (the equity loan), but loan A (the initial loan for the property) remains as variable are you still able to then request more equity on this property when it increases in value.
*** I note some people earlier commented that it was difficult to release equity when fixed...just want to clarify on the scenario detailed above. ***
with loan a, as it is not fixed, i believe u could simply revalue and draw out more equity laterand use with any other bank , provided u have serviceability
with loan b, because it is fixed, if u revalue, you can only use those funds with that bank, otherwise u would have to break the fixed loan and pay penalties
thats as far as i am aware. guys tell me if thats wrong
with loan b, because it is fixed, if u revalue, you can only use those funds with that bank, otherwise u would have to break the fixed loan and pay penalties
thats as far as i am aware. guys tell me if thats wrong
That's wrong.
There is only one security. Fix any loan that uses that security and you have to deal with that bank for the duration of the fixed rate period unless you want to pay break fees - and they know that so they're not going to be super cooperative or competitive if you want to do anything else in the meantime.
Shahin is right - it is in the broker's short term interest for you to fix as it locks in their trail commission. But yet our brokers on here warn people away from it except in strong circumstances - of course they only hear the stories of the clients who want out rather than those who were happy with the arrangement for the duration.
My own view is that fixing for a long time like this is a risk management policy only to be used when you really can't afford for rates to go up. It comes with so many disadvantages in reducing flexibility and choices that most times it is just not worth it. You can't just look at the IRs in isolation and ignore those other consequences because stuff happens in life and it's not fun watching the deal of a lifetime slip through your fingers because you fixed that loan.
It took me a long time to learn this lesson because I made a lot of money with fixing early on, which gave me a false sense that I could predict the future. The money I have lost since employing the same strategy has been most educational. Fix only if you absolutely have to ie - if you didn't you wouldn't do the deal because the risk wouldn't let you sleep at night. But even then just be careful that it's not your mindset seeing the bad side to everything - IMO you should only fix if that IR risk could realistically send you under during that fixed term - otherwise try to ride it out for all the reasons mentioned. You can't make money by hedging every risk...
Some good posts above (particularly Shahin) about cons of fixing. I only advise the 5 year fixed as an option for those with an NRAS play - more difficult to release equity and generally a 10 year commitment. Even then, its just an option on the table, usually shorter term fixed are better.
HiEquity - great point about risk mitigation. For those with large interest rate exposures and no further accumulation plans (no more lending required, and hence less of a need for flexibility) its well worth considering different fixed rate maturities to manage cash flow risk.
Remingbi - you can do an equity release (via a separate variable rate loan account) and leave your current fixed rate loan untouched. You can then use those funds as deposits for purchases where lending is with another bank.
The flashy 5 year rate is an easy sell - but the full picture beyond the sharp rate need to be well understood before making this choice.
Cheers,
Redom
HiEquity - great point about risk mitigation. For those with large interest rate exposures and no further accumulation plans (no more lending required, and hence less of a need for flexibility) its well worth considering different fixed rate maturities to manage cash flow risk.
Remingbi - you can do an equity release (via a separate variable rate loan account) and leave your current fixed rate loan untouched. You can then use those funds as deposits for purchases where lending is with another bank.
The flashy 5 year rate is an easy sell - but the full picture beyond the sharp rate need to be well understood before making this choice.
Cheers,
Redom
SO for the reasons you mentioned above, and if your LVR is low why fix then?
I have to yet find someone that can outsmart the banks?
S
Well when banks offer fixed rates they don't try to outsmart you either.
The argument of beating the banks for fixed rates is so wrong.
People who don't know how banks do their funding are clueless. Banks don't get funding from the RBA. They get their funding from deposits and from the markets.
When a bank lends you at fixed rate, they also borrow their funding at fixed rate (or get a matching interest swap derivative). In other words, their margin is locked in from Day 1 regardless of what the RBA does with rates in Day 2 or Day 364. If RBA cash rate falls, the bank does not benefit because their cost of funding was fixed from Day 1. This assumes that the bank is using normal risk management techniques when match-funding.
Well when banks offer fixed rates they don't try to outsmart you either.
The argument of beating the banks for fixed rates is so wrong.
People who don't know how banks do their funding are clueless. Banks don't get funding from the RBA. They get their funding from deposits and from the markets.
When a bank lends you at fixed rate, they also borrow their funding at fixed rate (or get a matching interest swap derivative). In other words, their margin is locked in from Day 1 regardless of what the RBA does with rates in Day 2 or Day 364. If RBA cash rate falls, the bank does not benefit because their cost of funding was fixed from Day 1. This assumes that the bank is using normal risk management techniques when match-funding.
The reason why you pay break fees for fixed loans is that they borrowed money at fixed rates in order to lend you money at fixed rates.
If market/variable rates go down and you break the loan, the funds you repay them will be lent out at lower margin.
If variable rates go up, you may actually be able to get away with NOT paying any break costs.
If market/variable rates go down and you break the loan, the funds you repay them will be lent out at lower margin.
If variable rates go up, you may actually be able to get away with NOT paying any break costs.
Beware of NAB and break fees.
Not sure if it still is , but it used to be , if you had a NAB fixed rate loan at say 7% ( or some interest rate ) and NAB loan rates went UP and you paid out the loan, you got no money from the bank.
