Is Fixed safer than Variable?

[jeromanomic]

I just read this article:
[self promotion URL deleted]

What do you think? Are fixed rates safer? I've had a loan for almost 6 years, but it has been in a time of falling rates. I'd like to know if this is maybe a good time to lock it in for a while.

 

[Aaron_C]

If you want certainty of repayments then nothing is 'safer' than a fixed rate loan...

Comparing our mortgage market to the USA is a bit silly since they have such a different system. It is common in name only.

 

[Peter_Tersteeg]

They might want to consider becoming qualified before they start giving out advice and education. They've got no credit license or financial services license that they've mentioned. These are a requirement for loans and financial products respectively.

US fixed loans are very, very different in nature to the offerings in Australia, as are the licensing and funding models. There's a lot of good reasons why the GFC had only a negligible effect on Australia whereas the USA is still recovering. A lot of it was economic, some of it was funding, none of the reasons we got out of it were because of Wayne Swan.

As for the 'safety' of Australian loans, we have on of the most stable financial environments in the world.

If you're concerned about budgeting and interest rate rises, then you should consider fixing. Statistically however, people are better off remaining on variable in about 2/3 cases.

 

[Rolf Latham]

depends what safe means.........

I have dozens of clients that will tell you they arent safe......... they come with baggage that simply dont suit some scenarios

ta
rolf

 

[Bunlee]

Is Fixed safer than variable?

On another thread I indicated that I am converting my IP loan to fixed for 5 years at 4.99%, SGB finally send the docs and I have looked them over and will sign over the weekend.

Notwithstanding, to be honest I am having a bit of 'decision paralysis '. Weird isn't it, happy to go into debt for my PPOR years ago as well as borrowing 105% for an IP 4 or 5 years ago without any problem at all (but paid truck loads off in the last few years, about 50%).

If fixed rates are so safe why the hesitation? Probably a feeling that I am taking on the banks in some way and why would I expect to 'beat 'them at their home ground with all their knowledge.

In the end I feel that I am taking the safe option in my circumstances and the downside risk is minimal at 4.99%. For the next 5 years I am limited to only $10K in reducing principal.

Perhaps the 'safe 'option of fixed rates forces me to invest excess funds outside paying down the IP loan into more 'risky' areas of super, shares or another IP.

Perhaps the safe option allows me to take more risks where my nature is to pay down the IP loan quickly.

Makes sense?

regards

 

[Rolf Latham]

taking on the banks in some way and why would I expect to 'beat 'them at their home ground with all their knowledge.

the lender is the "house" and will win regardless of what happens with rates, because they have bought your funds at a fixed rate and added their small margin.

Often its a super fund or similar that has provided the fixed rate funds to the lender

ta
rolf

 

[Jaggannath]

none of the reasons we got out of it were because of Wayne Swan.

Wash your mouth out, he has a trophy and everything!

 

[Redom]

Hi Bunlee - its not you making a bet with against the banks.

The pricing of fixed rates is dependent on the banks cost of funds. Expectations of future funding costs form only part of the cost of funds.

FYI, i've posted on it here before:

http://somersoft.com/forums/showpost.php?p=1194698&postcount=83

Cheers,
Red

 

[Redom]

As for the 'safety' of Australian loans, we have on of the most stable financial environments in the world.

This is true - but it is a dynamic concept that changes over time.

Risk build up and excessive leverage will test the system and overall, it damages the 'stability' concept of our financial system.

 

[Redom]

Wash your mouth out, he has a trophy and everything!

Hahahaha quality. And wrote a book about it for anyone that missed it. The good fight!

 

[Peter_Tersteeg]

Wash your mouth out, he has a trophy and everything!

I believe Peter Costello was fairly dark about that. Easy to take credit when you've been given a free ride. Hell, even Paul Keating deserves some credit for that trophy.

 

[Bunlee]

Hi Bunlee - its not you making a bet with against the banks.

The pricing of fixed rates is dependent on the banks cost of funds. Expectations of future funding costs form only part of the cost of funds.

FYI, i've posted on it here before:

http://somersoft.com/forums/showpost.php?p=1194698&postcount=83

Cheers,
Red

Hi all

I agree that banks are merely acquiring a commodity and on-selling it and it is not a function of future rates. Perhaps I am showing my age in that i felt that years ago the game was one of predicting rates and placing your bet against the house.

At an individual level I suppose we are taking a punt against rates going down and if they do, we feel that we ' lose ' - but we don't because there are many other factors that drive us to fix our rates.

On another issue, I have to say that this forum is great in that there is so much knowledge and willingness to help people. Also, I enjoy the reaction when a first time poster comes in with something to share (read: sell).

I am too conservative in many ways with the way I invest and this forum really challenges me to look at things differently. I will never develop or buy a block of units but I am thinking of ONE more IP down the track and believe me that is BIG, thanks for the inspiration for me to even think of one more.

All the best

 

[Redom]

Being conservative and knowing why is pretty important i think.

It helps shape your strategy and allows you to make choices within those bounds. I'm no expert, but i believe even the biggest/best investors have periods of aggression and periods of conservatism.

Cheers,
Redom

 

[Bunlee]

Hi

I have sent the docs off now and it will take about 4-5 days for SGB to fix the rates.

I tend to be a fairly reflective person and the opportunity to fix the rate in a favourable environment was a healthy process regardless of whether I chose to fix or not.

The decision provided an insight into the ' why ' behind my investing and the process helped me bed down some things that I had taken for granted in relation to investing.

One element is that my only loan now has a known cost for the next 5 years and my ability to pay down the loan is limited to 10k pa. Previously, I had paid down over 280k off the loan over 4-5 years. Could I have used that money more effectively? It comes down to many factors, especially personality.

The decision to fix has now reduced my option with extra capital. The decision is now shares, super, another property or lifestyle for the extra capital.

This could be a long post but it all comes down to there being sign posts in our lives that prompt us to stand back and question ourselves as honestly as we can. This decision was one such opportunity for me.

regards

 

[Jaggannath]

I believe Peter Costello was fairly dark about that. Easy to take credit when you've been given a free ride. Hell, even Paul Keating deserves some credit for that trophy.

Lies, all lies. Swanny saved Australia, it's just because he wears his red underpants on the inside that we don't realise it.

And I reckon Costello must have been fuming, but he did benefit from some of Keatings hard decisions (and I can't stand Keating, my personal opinion is he's a complete self-seeking ar*****le, but at least he saw and did what needed to be done.)