Who believes fixed rates will be cut?
- Thread starter want2bewealthy
- Start date
I'd be interested in what is the norm in Australia as a % also?
Also, how many Billions of dollars of home loans did the banks take in with the rush to fix?
High cost of funding for the banks needs to be passed on; how about the increase of bank margins in the past year?
With banks not wishing to pass on rate cuts hopefully some of the second tier lenders stand up to the plate, I'm expecting long-term rates to ease back a bit at some stage should competition arise and short term rates to go lower...but the tea leaves are murky and it could just be my lucky numbers for this week, or a suggestion to not wear my blue hat next friday?
Michael, that is very cynical of you
.........but I have to admit to holding the same view..............I'm waiting for now.
I think Mr Whtye is right.
A "cunning plan" of the banks that appears to have worked. I personally know of the number of FHO who have signed up for weird locked style loans that seem to be all one way ( i.e. Banks). All never had a loan before and very green. Ripe for the plucking by the banks.
And...
If this is the end of the doom and gloom (and thus the bottom of rates) then the economists truely, have no #%&# idea. Where is the pain? Where is the 10% Job losses? The 40% drop in property? Was it all just "chicken little".
Tried to give Kudos to ya Mike but system will not let me. Got to share.
Peter 14.7
A "cunning plan" of the banks that appears to have worked. I personally know of the number of FHO who have signed up for weird locked style loans that seem to be all one way ( i.e. Banks). All never had a loan before and very green. Ripe for the plucking by the banks.
And...
If this is the end of the doom and gloom (and thus the bottom of rates) then the economists truely, have no #%&# idea. Where is the pain? Where is the 10% Job losses? The 40% drop in property? Was it all just "chicken little".
Tried to give Kudos to ya Mike but system will not let me. Got to share.
Peter 14.7
So you reckon it's a conspiracy theory. Every banks business model is pretty simple - to make money on the margin between what they can borrow at and what they can lend at. They don't know (or care) what rates will do in the future - no-one knows for sure.
If you think they are acting in coordination then you should get onto the ACCC - that's market manipulation.
And if you think there's a flurry of borrowers out there who will fix rates at the bottom then I think you give the borrowing public a lot more credit than I think they are due. I'd bet 99% of the borrowing public haven't even realised that fixed rates have risen... and 50% of the rest don't care... and 50% of the remainder aren't interested in fixing anyway. Do you really think all the banks are coordinating to 'trick' <1% of their customer base ?
IIRC I read that 97% of recent new loans are variable, and only 3% are fixed.
Job losses & house price falls are trailing indicators. The stock market & longer term interest rates tend to be leading indicators.
And I believe fixed rates won't go much lower than they were 2 weeks ago. I fixed ~75% at the recent low point. I believe they are more likely to be higher than lower within 12 months, and are far more likely to be higher than todays rate for the majority of 5 year term.
It really comes down to whether you'd cross a river than averages 4 feet deep, or choose one that is 4'6" for as far as the eye can see.
So do banks make more margin on fixed or variable rate mortgages?
I've heard from many sources that margins are greater on the variable. I think thatm to some extent, the FHB flurry has the banks increasing the fixed rates to a) steer them toward higher margin variable loans or b) increase the margin on the fixed, seeing as many newbies want to go down the fixed loan path.
I'm not a conspiracy theorist, but it all looks a bit suss to me.
Answer: Yes, I do.
The banks don't openly coordinate but they "watch" each other. Clearly had one of the big 4 dropped the full 0.25% last time the others would have mostly followed.
And with a number of the smaller players such as STG. Bank West, Aussie etc...being owned by the big banks, we have less competition to force a drop.
Peter 14.7
PS as for ACCC acting they are all mates at the banks etc.. and the ACCC will not care. I contacted them about dodgy dealing at out ABC Learning Centre AKA NELC and they advised it was
6 months later when ABC fell over , the ACCC claimed no-one alerted them. Proving the obvious is harder than observing. Case in point: petrol rises each holiday.
Peter 14.7
The banks don't openly coordinate but they "watch" each other. Clearly had one of the big 4 dropped the full 0.25% last time the others would have mostly followed.
And with a number of the smaller players such as STG. Bank West, Aussie etc...being owned by the big banks, we have less competition to force a drop.
Peter 14.7
PS as for ACCC acting they are all mates at the banks etc.. and the ACCC will not care. I contacted them about dodgy dealing at out ABC Learning Centre AKA NELC and they advised it was
- all fair,
- so what,
- we will get back to you.
6 months later when ABC fell over , the ACCC claimed no-one alerted them. Proving the obvious is harder than observing. Case in point: petrol rises each holiday.
Peter 14.7
MW i think you have somthing in this! notice only two of them chose to collaberate on this?
The latest RBA figures show perhaps a fall and although we can see the dow and asx become firmer, this data will be calculated in three months time, so this leaves a window for may, june , july , for somthing like a rate reduction and greater confidence, for the econ , then we are back to sunny days in spring!
The latest RBA figures show perhaps a fall and although we can see the dow and asx become firmer, this data will be calculated in three months time, so this leaves a window for may, june , july , for somthing like a rate reduction and greater confidence, for the econ , then we are back to sunny days in spring!
Hi All
On the problems I see with future rate drops is the Banks are not compelled to pass them on and frankly, don’t need to pass them on.
Confused?
Well a broker mate of mine says the Banks are flat out signing up FHO with the FHOG boost. They don’t need to be competitive. The are not dropping rate of Credit Cards, Bus Loans etc..They are pocketing the windfall. Why drop rates to help established loans? Where we all gunna walk to?
So business are still paying high rate and hitting the wall but all the papers write is the proverbial young couple all smiles in their new Mc Mcansion.
Costello was right when he said tax cuts and lower rates were better than stimulus. Tax cuts allow workers to spend more, even earn less (less hours) and keep a job. Lower rates and tax help business. Stimulus encouraging a boom in targetted areas such FHO new builds yet does nothing for general manufacturers and employers. Good time to be a chippie!
Peter
On the problems I see with future rate drops is the Banks are not compelled to pass them on and frankly, don’t need to pass them on.
Confused?
Well a broker mate of mine says the Banks are flat out signing up FHO with the FHOG boost. They don’t need to be competitive. The are not dropping rate of Credit Cards, Bus Loans etc..They are pocketing the windfall. Why drop rates to help established loans? Where we all gunna walk to?
So business are still paying high rate and hitting the wall but all the papers write is the proverbial young couple all smiles in their new Mc Mcansion.
Costello was right when he said tax cuts and lower rates were better than stimulus. Tax cuts allow workers to spend more, even earn less (less hours) and keep a job. Lower rates and tax help business. Stimulus encouraging a boom in targetted areas such FHO new builds yet does nothing for general manufacturers and employers. Good time to be a chippie!
Peter
Hi All
On the problems I see with future rate drops is the Banks are not compelled to pass them on and frankly, don’t need to pass them on.
Confused?
Well a broker mate of mine says the Banks are flat out signing up FHO with the FHOG boost. They don’t need to be competitive. The are not dropping rate of Credit Cards, Bus Loans etc..They are pocketing the windfall. Why drop rates to help established loans? Where we all gunna walk to?
So business are still paying high rate and hitting the wall but all the papers write is the proverbial young couple all smiles in their new Mc Mcansion.
Peter
So the FHOG reverting back to $7000 only will probably be the best thing for rates. Hopefully banks business will dry up, and they need to start making "deals" again. At least we will be able to get an approval in less than 6 weeks!
Well...One thing the majority of the ppl here agree to is the RBA cash rate will fall from 3% to 2% by end of this year or early next year.
Having said that I believe the banks will find it hard not to pass any of those cuts as there will be a huge outcry by the media, politicians and the general public. I would guess they would atleast pass 50% of the cuts. Which should bring the SVR to somewhere between 5.25% to 5.35% approx. and with discounts it would be around 4.55% to 4.65% approx.
So what I am curious know what would be the 3 and 5 year fixed rates when we hit the lowest in variable rates?
So far I have noticed the 3 years fixed rates not much higher then the discounted SVR. Which means if say by last quarter of 2010 we predict a recovery (which is optimistic) we will not see any huge rate rises from RBA until then. Remember unemployment is supposed to be at it's highest levels next year. So for RBA or banks to raise variable rates significantly is highly unlikely.
So wouldn't it be a smart to lock in rates for 3 years around that time when we first start to see a possibility of a rate hike. I would even say that wait until atleast just before the 2nd rate rise and lock in for 3 years. That would mean we should come off the fixed rate at the same time as ppl who are fixing rates now for 5 years. But we would have enjoyed the lowest variable rates for nearly 2 years and possibly 3 years fixed rates will not be too much higher then the variable rate at that time.
Cheers,
Oracle.
Having said that I believe the banks will find it hard not to pass any of those cuts as there will be a huge outcry by the media, politicians and the general public. I would guess they would atleast pass 50% of the cuts. Which should bring the SVR to somewhere between 5.25% to 5.35% approx. and with discounts it would be around 4.55% to 4.65% approx.
So what I am curious know what would be the 3 and 5 year fixed rates when we hit the lowest in variable rates?
So far I have noticed the 3 years fixed rates not much higher then the discounted SVR. Which means if say by last quarter of 2010 we predict a recovery (which is optimistic) we will not see any huge rate rises from RBA until then. Remember unemployment is supposed to be at it's highest levels next year. So for RBA or banks to raise variable rates significantly is highly unlikely.
So wouldn't it be a smart to lock in rates for 3 years around that time when we first start to see a possibility of a rate hike. I would even say that wait until atleast just before the 2nd rate rise and lock in for 3 years. That would mean we should come off the fixed rate at the same time as ppl who are fixing rates now for 5 years. But we would have enjoyed the lowest variable rates for nearly 2 years and possibly 3 years fixed rates will not be too much higher then the variable rate at that time.
Cheers,
Oracle.
Extremely unlikely in my view. The RBA is getting into diminishing returns given a 2% is not likely to be reflected in customer rates for borrowers and earning rates for savers would be getting into keep-it-under-the-bed territory.
Also, if the lowest rates in 50 years aren't doing the job, time to look for something else.
TF I am sure you have to agree that the recession would be much much worst if we were still paying 9%+ interest rates? So your statement is not completely valid. It might not cause a boom in the economy but it is atleast preventing it from a free fall. Also it would be a bit naive to expect our economy to be booming when the rest of the world is in recession.
So if you ask me the cuts in interest rates are definitely doing the job. RBA needs to have room for further cuts when it examines the full impact of all the stimulus packages and when unemployment hits it's higest levels. But if the stumulus packages do the job and unemployment doesn't go as high as everyone predicts then I don't expect the RBA to be cutting rates down to 2%. Atleast now they have the option to do it when and if required.
Cheers,
Oracle.
Subject to your strategy. Lock for minimum of 5 years if not 7.
IMO 3 years means you may well come unlocked in the middle of the next boom and with high rates (7 or 8%) . If your strategy is to sell then well and good. If to hold then lock as long as possible.
Remember, you make the most of the saving from locking in the last year!
I.e. say you lock now so June to June each year for 5 years and assuming a slow recovery from 2010.
1st year: fixed 6% unfixed 5% lose of 1%
2nd year; fixed 6% unfixed 6%, neutral
3rd year; fixed 6% unfixed 7%, win of 1%
4th year; fixed 6% unfixed 7.5%, win of 1.5%
5th year; fixed 6% unfixed 8%, win of 2%
Any other this say 7 years is likely to be
1st year: fixed 6.5% unfixed 5% lose of 1.5%
2nd year; fixed 6.5% unfixed 6%, loss of 0.5%
3rd year; fixed 6.5% unfixed 7%, win of 0.5%
4th year; fixed 6.5% unfixed 7.5%, win of 1%
5th year; fixed 6.5% unfixed 8%, win of 1.5%
6th year; fixed 6.5% unfixed 8%, win of 1.5%
7th year; fixed 6.5% unfixed 8%, win of 1.5%
Peter
IMO 3 years means you may well come unlocked in the middle of the next boom and with high rates (7 or 8%) . If your strategy is to sell then well and good. If to hold then lock as long as possible.
Remember, you make the most of the saving from locking in the last year!
I.e. say you lock now so June to June each year for 5 years and assuming a slow recovery from 2010.
1st year: fixed 6% unfixed 5% lose of 1%
2nd year; fixed 6% unfixed 6%, neutral
3rd year; fixed 6% unfixed 7%, win of 1%
4th year; fixed 6% unfixed 7.5%, win of 1.5%
5th year; fixed 6% unfixed 8%, win of 2%
Any other this say 7 years is likely to be
1st year: fixed 6.5% unfixed 5% lose of 1.5%
2nd year; fixed 6.5% unfixed 6%, loss of 0.5%
3rd year; fixed 6.5% unfixed 7%, win of 0.5%
4th year; fixed 6.5% unfixed 7.5%, win of 1%
5th year; fixed 6.5% unfixed 8%, win of 1.5%
6th year; fixed 6.5% unfixed 8%, win of 1.5%
7th year; fixed 6.5% unfixed 8%, win of 1.5%
Peter
Below is a chart showing the 5yr govt bond yield between 1st August 08 and 6th May 09. The rate the banks borrow at is largely based on this 'risk-free' rate.
It's pretty easy to see that the rate fell continuously from 1st Aug till it bottomed in mid January, and the trend since then has been consistently up. Fixed mortgage rates offered by the banks have largely followed. If this trend continues then the likelihood of lower fixed rates in the future is small - you can make your own judgment about that.
The raw data comes the RBA. The spreadsheet contains the data for various terms, so you can do your own chart.
It's pretty easy to see that the rate fell continuously from 1st Aug till it bottomed in mid January, and the trend since then has been consistently up. Fixed mortgage rates offered by the banks have largely followed. If this trend continues then the likelihood of lower fixed rates in the future is small - you can make your own judgment about that.
The raw data comes the RBA. The spreadsheet contains the data for various terms, so you can do your own chart.
Attachments
Nice work Keith - both in this and the other thread. I guess what occurs to me is that with the currently high spread between fixed and variable, what is the likelihood of future fixed rates being higher than current fixed rates?
In other words, if you take a five year example, are future fixed rates going to keep rising with the predicted future increases in variable rates? That would require the yield curve to keep going up from now, when it is already looking pretty steep on a historical basis.
If future fixed rates don't go up as much as the future predicted rises in variable rates, then you could be better off enjoying the lower variable rates in the front end (when the discount is worth more) and then fixing later on a rate not too dissimilar than you can fix currently.
Another example - you previously pointed out that 10 year fixed rates typically don't move very much because they track the long term average anyway. If that holds in this cycle you could be considerably better off staying variable at least until the variable rate crosses the 10 year rates and then fixing for 10 years. Obviously 10 year fixes come with their own issues but I'm just using it as an example.
Fixed rates are nearly always higher than variable but I have rarely seen them at this much of a premium and suspect the premium will reduce as (and if) variable rates rise over this period. I would be interested in your thoughts...
Thanks HiEq... At the risk of stating the obvious.... the markets tries to anticipate what's going to happen over the next (say) 5 yrs. Fixed rate will be higher if the average RBA cash rate is expected to be higher as is the case today. 12 months ago people were fixing at relatively high fixed rates because the cash rate was high & expected to fall.
Looking at the above chart, it appears that the historic lows are unlikely to be repeated, and the only way from here is up. Stock markets around the world appear to think there's less uncertainty around & the recent trend is up.
I think so. Bond rates are trending up, the economic cycle appears to now have a known turning point. 4 months ago, another depression & fear was the order of the day. Today, some of the uncertainty has dissipated. We now are more certain about how bad things will get. This is reflected in the risk premium paid by banks..... from Business Spectator 6th May
Business Spectator said:
Absolutely. However, my view is that we've had recently had unprecedented economic uncertainty, hence the historically low cash rate & bonds rates. If things improve economically then we'll have both higher cash and bonds rates. If things get worse then they'll both fall again (maybe below the recent lows), however, the risk premium demanded by wholesale borrowers will rise significantly to counter the low rates. I think it's unlikely that the risk premium will fall significantly if the world economy picks up.
I'd tend to be sceptical of that theory. I'd expect the 10 yr term to reflect the long term average SVR with a bias towards the current SVR. This is because both the near future (& cost of borrowing) is known and because there is a weighting towards known good economic times. This point probably needs a graph to explain it a bit more clearly.....
Assume 10 yr fixed rates cover more than one business cycle. The black line below shows the SVR and the red one the long term average SVR. The three coloured lines are the same length & cover a 10 yr fixed rate period. Fixing 12 months ago (yellow) covers 2 high portions of the business cycle & one low. It also starts with a known high SVR/bond rate. Consequently the fixed rate is high.
The start of the green line is where we are now (IMO). We have low bond rates, and are v. likely to have a below average economic period for the next 12 months, and quite possibly another one after the good times. So the average SVR is likely to be a bit below the long term average SVR & also the average SVR for the fixed 10yr term.
You're suggesting wait until the start of the blue line before fixing. I'd expect the 10yr fixed rate to be above the long term average SVR when the SVR first goes higher than the the 10yr fixed rate. It will be dependent on a known high SVR, and known good economic times.
There weren't 12 months ago. They tend to be less extreme than the SVR ie closer to the average. I posted here yesterday the SFE yield curve for 7th May
and said....
keithj said:
I guess the surprise jump in retail sales, the dip in employment and the (fairly remote) possibility that we won't have a 2nd -ve growth quarter & technical recession caused it.
