Fixed vs floating

Fixed vs Floating: New Year, New Interest Rates?

Starting off 2019, interest rates are staying low but the Reserve Bank may have a trick up its sleeve that could have a downstream influence on the great fix versus float debate. Brendon explains.

 

There has been some post-Christmas sharpening of home loan interest rates. 

You will see a 3.99 per cent for one-year and two-year loans currently being advertised. This normally applies for "main bank", owner-occupied clients (in other words, not for low deposits or investor-only clients).

 

From an economic perspective, there doesn't seem to be any upward pressure on these rates for 2019. Interestingly enough, the only pressure that may come to bear is a potential Reserve Bank/government regulation requiring banks to hold more capital.

 

The Reserve Bank has suggested that the percentage of "money [that] banks have in hand per amount of loans outstanding" may need to increase to better protect the banking system from any economic shocks (known as capital adequacy ratios). If this is implemented, it will effectively increase banks’ running costs. Unless the shareholders are willing to take lower returns (??!!), then the customer will pay—at banks, this means increases in interest rates.

 

So, should you fix or float?

 

Securing an interest rate under four per cent isn't bad!

 

Up until now, most of our clients have been fixing for one year because that was the lowest rate and because the expectation was rates would stay low for another year, giving time to re-fix in a year for a still low rate. 

 

The only spanner in the works to this approach is the possibility of the above regulatory change, which still remains to be seen. The potential for changes introduces some uncertainty to the mix and some of our clients may choose to minimise that risk by fixing for two years, at what is now a great two-year rate.

 

Be aware that all clients won't get that exact rate, as it is case-by-case, bank-by-bank. If you have good equity, you should be getting close. Note also that everyone is different, so how long you fix your loan for may be different than the next person.

 

Also note that it is often wise to keep some flexibility. Channelling any cash surplus to your home loan in a smart way can surprise many with the difference it can make.

 

We can work that all out for you.

 

Brendon Ojala is a Registered Financial Adviser with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.

Fixed vs Floating: Feeling lucky?

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Brendon reveals the current best rates on the market and suggests that now might be a good time to bet on interest rates staying low.

Assuming you have at least 20 per cent equity and an average-sized loan on an owner-occupied property (note that these things matter when it comes to what interest rate you will be offered) the following are good rates right now:

 

·      1-year fixed rate is 4.3%

·      2-year fixed rate is 4.6%

·      3-year rate is around 5.0%

·      5-year rate is around 5.5%

·      A good floating rate is discounted to around 5.20%.

 

The amount of cash you can expect to receive from the bank as an incentive will vary anywhere from zero to almost one per cent of the loan amount.

We have seen a few drops in interest rates over the last week or so. Lenders are definitely starting to sharpen their pencils on their two-year fixed periods, as well as some of the longer term rates. And we are starting to see some good discounting on particularly strong deals. It looks like banks may be gearing up for their “spring sales”—if there is such a thing in the banking world.

So, what would I do if I was fixing my mortgages right now? 

If I felt like taking a bit of a gamble, I may fix for one year and roll it over year-on-year. I would win this gamble if rates don’t go up too fast over the next few years, as the 1-year rate is the cheapest on the market. To back up this approach, of late, there have been hints that things aren’t going anywhere fast, both locally and internationally, so perhaps it’s not a bad bet.

If, however, I get that wrong, and my budget won’t deal with large potential increases in mortgage costs over the next few years, I would fix for two or even three years and be willing to pay a little more now for that certainty. I would definitely keep some of my loan floating (in lines of credit or offset accounts) to allow me to pay extra down and have the flexibility of re-drawing these funds should I need to.

Additionally, banks are making it increasingly easy to re-fix on line. However, the downside of this is that there is no advice being offered during the re-fixing process.  So if you want some advice around what to do with a home loan that is rolling off a fixed rate, do get in contact with your friendly Velocity adviser.

Brendon Ojala is a Registered Financial Adviser with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.

Fixed vs Floating: What's new, what's old and what to do about it

While the OCR remains unchanged, most interest rates are inching up … what’s going on? Brendon explains.

 

Here is what I have noticed in the last month or so …

 

1. Interest rates have nudged up bit by bit

We are seeing most banks increase their rates by around 0.1% over the majority of their term periods. Although the Official Cash Rate is firmly grounded, these rates are rising because the sources of the banks’ money are rising. Firstly, deposit rates are rising so that banks can attract more deposits, and, secondly, international interest rates (of which banks pay to get some of their money) are also increasing. These increases are being passed on to us, the homeowners.

 

2. There are noticeable differences between banks

The interest rates that banks are willing to offer their clients are varying between banks. For those banks wanting to "grow their mortgage book", there are some good discounts on rates. The banks that are not discounting are either happy with their current mortgage share or their other “banky type ratios” are at their “banky limits” so they have no wiggle room left—they simply aren't interested in competing on rates. 

Given this variation between banks, the old trick of shopping around and going back to the bank with the other banks’ rates isn't having much of an impact, if any.

If the bank is your "main bank"(generally defined by the fact that your salary or wages are going to that bank) then you will get better rates.

 

3. Banks are giving significantly different rates for investment property loans as compared to owner-occupied loans

The reason for this difference is that new regulations make banks hold more capital for different types of loans. Investment property loans are more costly for the bank and they are passing these costs on.

 

4. Interest-only loans are harder to get

Many banks are only allowing interest-only loans on investment property and then are limiting it to say five years tops. At Velocity Financial we currently need to find highly compelling reasons for banks to agree to interest-only loans on owner-occupied property.

 

5. More now than ever, it is hard to say what a good rate is ...  it depends on all of the above

The above points also mean a good strategy is more individualised than ever. As always though, you fix for certainty—the more certainty you want, the longer you fix (but the higher rate you pay)—and the more flexibility you want, the more you have in some form of floating loan account.

If you are in more of a complex situation with multiple properties, working with us, your accountant and your lawyer, to design the best strategy is increasingly important. To fix or float is just the start! Often we will be working with multiple entities with multiple loan products at multiple banks. We don't want to complicate things for the sake of it, but having this set up correctly can enable our clients to get ahead quicker, to be as well protected as possible and to make significant savings.

If you have a simple set up or need a complex configuration we are happy to work with you to ensure your loan structures are well thought out and optimised for today’s climate.

 

Brendon Ojala is a Registered Financial Adviser with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.