Fix Now or Wait ?

[keithj]

Starting to get interesting those numbers, especially if this rally in pretty much everything shows itself to be sustainable.
.....
Keith, what are your thoughts on the present situation?

Hi Andrew,


My thoughts on fixing now......

Firstly looking backwards for some perspective....

From the RBAs chart pack

3 yr bonds (brown line) formed a bottom in Feb and are rising slowly...... obviously we don't yet know if it's the bottom.
...and 3yr home loan fixed rates are a historic lows.....

Likewise, 10 yr bonds hit long term lows in Jan/Feb, and have risen slowly since then.

So looking forward.....

Westpac is forecasting that 10yr bonds will fall by 90bps by September, and 3yr bonds will fall by 60bps by December
ANZ is forecasting that 10yr bonds will fall by 100bps by September, and 3yr bonds will fall by 40bps by December

If these forecast falls do occur, then the 3 yr & 10 yr bond rates will be v. close to the corresponding lows rates of Jan/Feb 09. So in their view it seems likely that govt bond rates have seen their bottom - all the impending bad news (rising unemployment, -ve GDP growth etc) is already priced in.

The short term yield curve has steeped considerably in the last 3 weeks and the 18 month outlook is for higher rates than todays.... this hasn't been the case for a while. The markets are still expecting the RBA cash rate to fall by around 50-75bps within 6 months, but they're expecting it to rise significantly & quickly in the 6-12 months after that. Contrast this with the yield curve of February - rates were expected to be lower for longer back then.

Some commentators feel that longer term rates have already priced in the expected bottoming of the cash rate at 2-2.25% by middle of this year, and won't fall much further (if at all).

The banks failed to pass on all of the last RBA rate cut.... the cash rate is expected to fall by a further ~50bps and they'll probably pass on most of it, but when rates start to rise it v. likely they will pass on all of the rises immediately.


So assuming govt bond rates have bottomed....

....the other consideration is what risk premium will be demanded by wholesale lenders. That is currently a little uncertain, but IMO more positive than 3 months ago. Commbank has recently borrowed $B+ without using the govt guarantee and there is talk that the guarantee won't be needed at all within a few months. That's a positive sign. So I'd expect that risk premium not to increase. It will probably settle back to 'normal' - ie not excessive (as it has been for the last 12 months), and not under priced (as it was for the previous 5+ yrs). It looks likely to me that fixed rates are at or v. close to their bottom.

The next question is how long to wait before fixing - they may stay at or v. close to their current levels for some time. An advantage of waiting before fixing the rest is you benefit from both low var rates now & also from a (hopefully relatively low) fixed rate for longer. EG Wait for 3 months & you get 5yrs & 3 months at low rates, if you fix today, you only get 5 yrs.

Next question is how long to fix for.....
I've mentioned before that I'd prefer to mostly fix for 5yr terms as it's likely that in 3 yrs the cash rate will be a lot higher than today. I'm expecting that a 5 yr fix buys me an extra 2 yrs of rates below the var rate.

And I'd seriously consider borrowing for a 10 or 15 yr term for at least the value of my PPOR. As a worst case scenario I'll always need borrowings of at least that much, so fixing at well below the average variable rate will provide some cheap insurance.

I may fix around 10-20% for 3yrs as they are particularly at good rates & I'd prefer not to have everything expiring at once. The 6 yr rate has been a particularly sweet spot on the curve, although I've never seen a bank quote a 6 yr fixed rate, so it may be worth enquiring.

And I'll be keeping a little at variable rates for flexibility.


If any of the banks do happen to get hold of some cheap money & offer a special deal over the next couple of months (like the WPac 3yr @ 4.99% last Jan), then I'd be v. tempted to pounce on it real quick.

One oft quoted reason not to fix rates is the potentially excessive break costs. It's important to remember that break costs are high when fixed rates have fallen. They are usually trivial when fixed rates are higher than when you your fixed rate. Fixed rates are currently at historic lows - as I'm expecting fixed rates to be higher within 12 months I'd hope any break costs would be minimal.


The bottom line

Long term rates appear to have bottomed & be rising sustainably. The forecasters are expecting them to go no lower. Risk premiums appear to have stablised. The uncertainty surrounding the GFC seems to have abated, it appears that the markets have just got a deep/long recession to handle. They can deal with that & have probably priced it accordingly.... so my feeling is that we're seen the low in fixed rates. We may have small further falls, we may have occasional special deals, but we're at or v. close to the bottom.


What I'm going to do...

I'm still going to wait..... and when the first (hopefully v. small) rise happens I'll fix approx 1/2 of my borrowings, and leave the remainder until the outlook becomes clearer and I'm more certain that the knife really has fallen as far as it's going to.



....of course none of this is advice... find someone with paper qualifications for that.

 

[GreenTreeFrog]

Thanks so much for that well written perspective.

I am currently gathering this sort of info to make the fix or wait decision. Waiting for now. Mainly because we are yet to sell and settle on the new place. Then I will definitely fix.

 

[Ross]

Great thread KeithJ, I think Im going to continue my enquiries with my banks (STG and Adelaide) and look to lock in my non-deductible loans which are around 50% of my total loans by the end of this month, mostly at 5yrs maybe a little at 3yrs

 

[BV]

Keith

Thanks for starting up this thread.

I have also looked into it and can't see a reason to fix yet.

cheers

 

[chilliaa]

Thanks for that Keith.

My gut feeling, and its only a gut feeling from trying to read the mindset of the RBA board, is that the RBA would prefer to keep interest rates a bit higher than the short term 'optimal' rate, so they dont have to increase interest rates as fast.

But this is only a guess and i wouldnt place much importance on it.

 

[exsyd]

I'm having a bet each way and fixing one property now for three years, because even if the rate continues to fall, I think it's a pretty good deal. (Paperwork's started but nothing's been signed as yet.) If the fixed rates get better still, I might fix another one then.

 

[Y33]

Keith,

Excellent write up.

Apart from say 50% fixed and 50% variable how would staggering the terms work out.

Would you consider staggering properties at 3, 5, 7, 10 yrs?
7 & 10 yrs would have to be exceptional rates.

Short term being for the properties prepared too let go if needed to either cash up or pick up an opportunity not too be missed.

One last question which I think a few investors are pondering with multiple loans. Which may be better, big loans or small loans at the fixed or variable rates now? This is more applicable for those with a few loans and no LOC etc or portfolio type set ups.

 

[Andrew_A]

Keith,

Excellent work. I have been considering the 50% fix option, also the staggering loan expiry idea is a handy strategy.

Thanks,
Andrew

 

[stumunro]

Great post KeitheyJ.

All food for thought.

 

[Edmond Dantes]

I'm fixing 50% of my loan as soon as the first IR rise happens.

 

[trajik]

I've looked at this also and my biggest argument against fixing is that you are guaranteeing a higher rate initially, and you are betting against the banks/IR markets. I've done some basic numbers from the current ANZ rates. The standard variable is 5.91% and 5 yr fixed rate is 6.84%. Some basic excel spreadsheet work on a couple of scenarios came up with these results over a 5 year period:

Total repayments if the SVR remains at 5.91% (highly unlikely!) = $38,328
Total repayments at the Fixed Rate = $41,796
Total repayments if the SVR increases to 6.84% after 2 years, then 8% after another 2 years = $41,311
Total repayments if the SVR increases to 6.84% after 2 years, then 10% after another 2 years = $42,954

So, fixing now would need the SVR to go between 8% and 10% in 4 years time to make it at least similar to remaining with the SVR. Although I do believe that the SVR is at the bottom and the only way is up, I'm not convinced that in 5 years time the rate will be 10%, although it is a possibility with the potential for high inflation once we get out of the current cash splash.

Anyway, I think it's a smart idea to consider the numbers and then make your decision based on hard facts and your own opinion on future interest rates.

 

[redwing]

Thanks Keithj

Great and thought provoking post, we have some concerns re: rates reaching the bottom, however, expect that variable rates may still fall a bit further in the short term as outlined in this post

Have long term fixed rates pretty much found rock bottom?

Is anyone expected further decreases on the five year rate?

Banks are crying re: costs etc and at the end of the day serve the shareholders (especially major ones and directors ).

We are looking at the current fixed rates seriously at the moment and considering our scenarios moving fwd. As demand for these fixed rates goes up one would expect the banks to react, a number of thoughts are running through our heads though

Variable rates seem to hold good value at the moment and the bad news looks to continue on the world scene as well as at home, the economy seems to be getting worse. A couple of years at a low variable rate seems good value also, should we fix as a recovery gains momentum?


We are also aware that long term inflation will be an issue


which door..the red one or the green one....

interesting times

We are looking at the posibility of refinancing some loans, with low rates and increased rents having putting us in a nice position (best to take the opportunity).

If a number of other homeowners & investors fix in with 3 and 5 year rates in a panic, would this not artificialy increase these rates (i.e Bankwest)?

The Banks would be finding it hard to get investors as well to balance this up wouldn't they and the rates for invsestors don't look too good nowadays?

It would be interesting to know the numbers of people starting to "lock in" on fixed rates

Agree with your comment re: not having all your loans come due at the same time, who knows where rates will be in 3 or 5 years


We've also found the process easy when breaking a low rate to take on a higher rate, the banks are happy to play (not so much when the other way around though).

Biggest obstacle at the moment is tight lending criteria from the banks

 

[JIT]

I'm still going to wait..... and when the first (hopefully v. small) rise happens

Hi Keith, very nice post.

When you talk about the first rise, are you waiting for one of the big 4 banks to make a move?

What do you think of Bankwest's recent moves:

Bankwest was at 6.19% pa for ages then jumped to 6.59% pa, then soon after dropped to 6.50% pa briefly, and is now back up to 6.84% pa...

Seems like the first rise to me, but I'd like to see at least one other bank make a similar move before acting on it...

Bankwest's 5 year rate is quite ordinary now.

Having a loan with Bankwest I'm almost thinking of leaving it variable or selecting a 3 year rate (but that's still not very good either!).

 

[keithj]

Apart from say 50% fixed and 50% variable how would staggering the terms work out.

Would you consider staggering properties at 3, 5, 7, 10 yrs?
7 & 10 yrs would have to be exceptional rates.

Short term being for the properties prepared too let go if needed to either cash up or pick up an opportunity not too be missed.

Yes. I'd probably do 10 or 15 yrs for PPOR - I don't expect to ever need to borrow less than that & rates are below the long term variable average. If (big if) rates ever got back to 17%+, I'd be in a v. strong position & if rates fell below my fixed rate for periods of that 15yrs, I wouldn't be unhappy - there's more upside than downside IMO.

Regarding IPs, maybe I'll sell enough to be debt free one day, but I doubt that that will be within the next 5 yrs. If it is then I'll cop the break costs (if any).

IMO 1 & 2 yr fixed rates are expensive - the average variable rate over the next 2 yrs will probably be lower than either of those fixed rates. The 3 yr rate may be too - it's borderline.

Maybe do the sums - (as trajik has above).... what do you think the var rate will be in 1 yrs time & 2 yrs, etc ? Assuming you're paying a premium of 1.5% for the 1st year. So what do you need the variable rate to be for the remaining 4 yrs to come out ahead ?

In answer to your general question about staggering fixed expiry dates - I like the idea - I think diversification is one of the few free lunches around.

One last question which I think a few investors are pondering with multiple loans. Which may be better, big loans or small loans at the fixed or variable rates now? This is more applicable for those with a few loans and no LOC etc or portfolio type set ups.

Hard to say. However, looking back at loans I fixed 5 years ago, they seem v. small compared to my loans since then.

 

[trajik]

Forgot to mention that the numbers above were based upon a $100,000 loan.

 

[keithj]

When you talk about the first rise, are you waiting for one of the big 4 banks to make a move?

Yes. I hope it will be a small move initially ( < 0.2%).... and I hope it won't be my bank that raises first. ATM the longer I can benefit from a low variable rate the better. It's a risk, but I rather pay an extra 0.2% for the term and benefit from low IRs at the start & an extra few months of low rates at the end.

What do you think of Bankwest's recent moves:

Seems like the first rise to me, but I'd like to see at least one other bank make a similar move before acting on it...

Bankwest's 5 year rate is quite ordinary now.

I think Bankwests 5 yr rate has been up & down. I'd guess being a smaller bank that they buy relatively small chunks of fixed rate money & have to pay whatever the market offers. The big 4 buy it in big chunks & get a good rate & it lasts them for longer. So maybe Bankwest is a better tracker of long term rates, & the next chunk the big4 buy will be more expensive ?

A few of the non-bank lenders fixed rates have been volatile too. I too would like to see a major raising theirs before I fix.

 

[exsyd]

I've looked at this also and my biggest argument against fixing is that you are guaranteeing a higher rate initially

Good point, and I wouldn't take a 5-year rate for exactly that reason. However, the current 3-yr rate I can get is BELOW my current variable, so I'm prepared to take that on if I can get it. (Granted, I could probably renegotiate my variable down 10 basis points, which would put it marginally below the fixed rate, but it's very near either way.)

Anyway, I agree that it depends on both your risk evaluation and your own personal circumstances. I figure that if variable rates go down another percent and stay down... well, it'll help the variable ones

 

[devo76]

Good point, and I wouldn't take a 5-year rate for exactly that reason. However, the current 3-yr rate I can get is BELOW my current variable, so I'm prepared to take that on if I can get it. (Granted, I could probably renegotiate my variable down 10 basis points, which would put it marginally below the fixed rate, but it's very near either way.)

Anyway, I agree that it depends on both your risk evaluation and your own personal circumstances. I figure that if variable rates go down another percent and stay down... well, it'll help the variable ones

Now i am no whizz at this but the fact that the lower 2 and 3 year rates are below current variable. This implies that the banks believe rates to drop further during this period.This is why some believe the 2 and 3 year rates not to be a good pick as there is a good chance the variable may be below these points in the short term.

 

[trajik]

exsyd,

Interested to see which bank has fixed rates below variable at present. I've had a quick look at a couple of banks websites and all fixed rates are above the variable?

 

[JIT]

Yes. I hope it will be a small move initially ( < 0.2%).... and I hope it won't be my bank that raises first.

I hope so too...a bit of luck involved in all of this it seems.

I think Bankwests 5 yr rate has been up & down. I'd guess being a smaller bank that they buy relatively small chunks of fixed rate money & have to pay whatever the market offers. The big 4 buy it in big chunks & get a good rate & it lasts them for longer. So maybe Bankwest is a better tracker of long term rates, & the next chunk the big4 buy will be more expensive ?

Possibly...either way it sucks to be with Bankwest.

Lucky I have borrowings with 3 different lenders though.

I must admit, all this fixed rate movement analysis makes me wonder whether just leaving the lot on the SVR would save a lot of time/expense...