Fix Now or Wait ?

[silversands]

My head is spinning.

I have to decice TODAY whether to go do the paperwork at Bank S.A to fix one or two loans. (we are already with them on variable.The bank manager told me their fixed 5 yr rate is going up tomorrow.
We won't get .2% discount applied to our loans if we fix as they are lo doc loans. The rate today is still 5.94% for fixed 5 yr term.
One loan is currently @ 5.19% -$315k interest only. Not sure why this one is lower, I think they are applying the full doc rate but bank manager says not to concerm myself about it.
The other is @ 5.34% - $254K interest only.


Is anyone good enough with maths to please run possible scenarios, on how much we're likely to lose out on, if we fix - for the privledge of sanf? Nothing like admitting on an investment forum how much I suck at maths!


Every day I wake up and think I'll do it today and then get cold feet. If I don't do it today - rate will be up half percent from tomorrow. Then I read the article that quotes the NAB guy, who basically says that even though they have just upped the rates, they are likely to drop soon, as they vie for business. sigh decisions, decisions!

We will probably go ahead and fix. With a fledgling business to nurture, I think the possibility of rates going up 3 or more percent in the next 5 yrs is exposure we can't afford - still I would just really like to see some hypothetical numbers...

Thanks to all who bothered to read and particularly anyone who may answer!

Jo

 

[WinstonWolfe]

This might help a bit Jo.

Your average variable interest rate for the 2 loans is 5.26%.
I take it if you fix either or both loans today you get a rate of 5.94%.

The analysis above compares fixing both loans at 5.94% today against keeping both loans variable for 5 years. The av variable rate for each of the 5 years is listed in the table.

There are three scenarios - somewhat deflationary, inflationary, and middle of the road environments.

You want to consider the bright blue row. The numbers in that row are how much more all future fixed interest pmts cost compared to variable interest (in today's dollars).

Therefore, a negative number favours fixing because total fixed interest is less than variable interest.

Now, no one can tell you which scenario has the greater probability of unfolding.

If you don't fix, and we get an inflationary scenario, one where rates go above 10% in 5 years, you would be a lot worse off than the inflation scenario above.

However, if the economy stays in a sustained recession, similar to Japan in the 90s (which many argue is as likely to happen), then you would be worse off for fixing.

My personal view is inflation won't be a concern for over 2 years, and therefore we might see something closer to a deflationary or middle of the road scenario.

Anyway, you also have to consider the loss of flexibility that accompany fixed rates....re LOCs, drawing equity etc.

Good luck with it. If you aren't sure either way, but want to bias the SANF, then you could fix 2/3 and keep 1/3 variable on each loan.....or fix the bigger loan only....

HTH

 

[WinstonWolfe]

The other consideration Jo is time tends to even things out.

If the average interest rate over the last 30 years is 7.5%, and you can fix now for a long period (not 5 but 10 years) at less than 7.5%, then you increase the probability of being better off for having fixed now.

But only if the next 10 years averages 7.5% too

 

[silversands]

Wow! Thanks WW

I really appreciate your generosity in the time you gave my question. As I have said, we had pretty much decided to fix at least one if not both of them but I was concerned my motivation was based on my best guesstimate and not enough, on knowledge of how the different possible economic environments could affect our outcome.

I accept I'll be a bit disappointed if I make the wrong choice, nobody wants to pay more than is necessary, but paying several percent more would equal a lot more pain. Negative gearing in the next few years has no appeal for us as we no longer have the income to justify it.

Thank you for your two cents worth!

Jo

 

[WinstonWolfe]

thx. Jo

the spreadsheet that did this scenario is at the link I posted earlier in the thread.

if you aren't famliar with excel scenarios, you can just mess with the whatif worksheet and put your own idea of future interest rates in to see how it will effect you.

 

[silversands]

update:

have been to bank and signed on for 2 x five yr fixed rates. Only time will tell if this was the right choice but for now, it feels the most sensible choice for us!

Kudos coming for your spreadsheet WW! Thanks again.

 

[sash]

I fixed mine two loans recently one for 5.24% (2 years) and 5.59% (years).

Not convinced about the 5 year rate....it may head lower....

update:

have been to bank and signed on for 2 x five yr fixed rates. Only time will tell if this was the right choice but for now, it feels the most sensible choice for us!

Kudos coming for your spreadsheet WW! Thanks again.

 

[silversands]

^^ lower than what and with who? LOL! Don't get me going on the remorse trail now!

 

[danwatto]

I think Sash is probably joking... in the short term anyway. St George are putting theirs up too, the best rate.

The recent news story about rates coming down seems a load of bull.

Fixed rates are all heading north, some 10 years are 8/9% now!!!

I can't find a 5 year under 6% anymore, still waiting on St G decision on my valuation i.e. if I will get 5.79% 5 years.

 

[lizzie]

i fixed last week a large chunk of our loans - more a peace of mind thing as we are talking over the mil$ and a 1% increase makes a big difference.

kept the smallest on variable against on offset account.

sanf greatly improved

 

[WinstonWolfe]

All banks will not be immune to the same pressure ANZ is under....

This pressure is a disincentive for banks to drop fixed or variable, no matter what the RBA does...


ANZ shares tumble as H1 profit misses market forecasts

 

[Highlygeared]

All banks will not be immune to the same pressure ANZ is under....

This pressure is a disincentive for banks to drop fixed or variable, no matter what the RBA does...


ANZ shares tumble as H1 profit misses market forecasts

Is it probable that the banks will increase VARIABLE rates contrary to what the RBA is doing - dropping the cash rate or keeping it the same?

 

[WinstonWolfe]

Is it probable that the banks will increase VARIABLE rates contrary to what the RBA is doing - dropping the cash rate or keeping it the same?

Anything is possible HG....if our recession gets a lot worse and umemployment causes ever rising bad debts, the banks would have to cover it somehow.

But I am not a finance analyst and have no idea what the probabilities are of one thing or another happening.

I tend to think the banks would want to sure up balance sheets by stealth at first- cut divs a bit more, some new innovative fees, sell off some poorly timed OS acquisitions, climb credit card interest first, then fixed, then hit the commercials a bit more, then finally resi.... whether they'll close more branches is debatable...with the demise of non bank lenders they may not want to riisk a competitive disadvantage when things pick up....

 

[Highlygeared]

What that says from a pure financial perspective is, I should have fixed.

I know there's varying degrees but ceteris paribus, if the economy improves, rates will increase, if it tanks from here, rates may increase to offset bank losses from volume, defaults etc.

Too late to change my mind now.

 

[keithj]

Is it probable that the banks will increase VARIABLE rates contrary to what the RBA is doing - dropping the cash rate or keeping it the same?

Unlikely - that would be v. bad publicity.

NAB is calling for Debate on how interest rates are set. I'd say that's code for 'We won't be passing on much of the anticipated RBA cuts'

Asked about its willingness to pass on future interest rate cuts by the Reserve Bank of Australia (RBA) to customers, Mr Clyne called for a debate on bank funding costs to dispel the notion that the RBA cash rate was the sole determinant of bank lending rates.

"The banks have used the Reserve Bank for 10 years as cover for the way we move interest rates," he said.

"We've never taken the time to explain how banks are funded.

"The Reserve Bank cash rate is only a very small component of how we're funded."

Mr Clyne said the Australian economy faced some "enormous structural challenges" related to the reliance of the banks on offshore funding sources.

NAB did not pass on any of a 25 basis point rate cut by the RBA in April to its customers and said decisions on whether to pass on any future cuts will continue to depend on the funding costs issue.

"While it's pleasing that the marginal cost of funding is coming down, as things start to become a little more stable than they have been, the average cost is rising," Mr Clyne said.

NAB & ANZ are seen as the weaker of the big4 - they're both suggesting that they are having to pay bigger margins & they won't be passing RBA cuts on. The govt will be seen to make a fuss, but they'll be happy that the local banking sector remains strong. And the other two won't have much incentive to pass on the next RBA cuts.

The bottom line as I see it is that both fixed & var rates are unlikely to fall much from here.

 

[WinstonWolfe]

HG, what will be interesting is Rudd and Swan rhetoric (and actions) as NAB and ANZ become increasingly less competitive, and CBA and WBC pick up more market share, and a duopoly threatens....

 

[Highlygeared]

Unlikely - that would be v. bad publicity.

I'm not sure the banks really care about bad publicity, only financial consequences of their actions....particularly now with less competition and the ability to engage in informal collusion.

But hope you're right given I didn't fix. I wasn't expecting further falls but what held me back was the inkling that the recession will hang around for longer than the short term.

In addition, I have a couple of large fixed loans at 8%....so I NEED low variable rates to offset and flexibility.

 

[Ausprop]

"The Reserve Bank cash rate is only a very small component of how we're funded."


so... the RBA is largely irrelevant? maybe they should cease the cash rate if they aren't a sizeable particpant in the market?

we urgently need a new bank... using govt cash. They can always float it in afew year and put the proceeds in the future fund

 

[jaimeandrenee]

Great idea ausprop.

 

[redwing]

Don't Ask Me, I'm Lost

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Don't Ask Me, I'm Lost
By Scott Mitchell
global economic crisis
29 Apr 2009


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After only a couple of days in lockdown with the eggheads at meetings of the G20 Finance Ministers and the International Monetary Fund, Wayne Swan last week became aware that the economic crisis was worse than he'd thought.

On Ten's Meet the Press, Swan told the assembled financial journalists that after talking to the finance ministers of the world, it had become "pretty clear that this recession is deep and it will probably go for longer than many had anticipated only a short time ago".

The question is, why does our Treasurer have to travel to the other side of the world to get a reality check? And why are Australian broadsheets playing catch up on the economic crisis?

Until he left our shores, Swan was trumpeting the same delusions to which we've all been subjected recently. Swan's impression of the global financial crisis might well have been based on the same IMF reports given uncritical coverage by the Sydney Morning Herald last week. Quoting the IMF as an oracle, Jacob Saulwick and Phillip Coorey's front page article read as follows:

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