Reply: 2
From: Glenn Mott
Hi Charlie,
5 years can be a long time to fix your interest rate unless you definitely need to know what your outgoings are going to be for that period of time. Funny things happen in world economic markets and unforeseen world events cause changes here, a good example being the "Asian Crisis" in the late 90's.
Interest rates were on a downward slide until the economies of Thailand, Indonesia and Malaysia (3 countries that import a lot from us) fell in a hole. To my limited economic understanding, when Australians borrow money, it is generally for do-dads such as cars, electronics and white goods (all made overseas). Therefore, to stop us from buying things from overseas, and getting the import/export balance too much out of whack (my own economic jargon), the Reserve bank puts up interest rates. Our interest rates went up on a number of occasions shortly after the beginning of this crisis until the retail rate (the price you and I pay for our money) was around 8.5%. At this stage, all the legends who write newspaper columns about investing and business were suggesting that it was time to fix interest rates as they were definitely on an upward path! In the years since hitting that peak, interest rates have hit record lows and have been part of the reason why we have enjoyed strong capital growth nation-wide since.
As interest rates were coming down, I was paying around 7-7.5% variable (I can’t remember the exact figure) on 190k with one lender. Another lender had a product with no application fee and an introductory rate of 5.19%. This worked out to a saving of around $4000 for the introductory period, with my costs being stamp duty on the mortgage and the search fees. I did end up refinancing, and that introductory rate will convert to a standard variable rate in September. Fixing when rates were going up would have hurt my cash flow badly now and you may find the same scenario applies to you.
When thinking about the likely direction of interest rates, I try to apportion risk like insurance companies and banks do. For example: In my opinion, the possibility of rates going to the following rates in the next 12 months:
16% - 2.5% chance
14% - 7.5% chance
12% - 10% chance
10% - 12.5% chance
8% - 27.5% chance
7% - 40% chance
To me, this looks as though we have a pretty good chance of seeing interest rates between 7 and 10% in the next 12 months. Beyond this I will not forecast for myself. Commonwealth have an introductory rate of 5.04 % for 12 months for one of their products at the moment with no application fee. If you applied for one now, it would probably be July – Aug before everything was finalized, meaning you would pay 5.04% on your loan through to July-Aug next year in a time when it is very likely that interest rates will be 2-4% higher than this.
Please do your own figures. I am not a licensed investment advisor.
Glenn