Welcome to Finance and Fury

Today we have Jayden with us, and we will be talking about Interest rates. The first Tuesday of every month, the RBA releases the updates on the cash rate.

The markets currently appear to be going down, and the cash rate reflects a negative trend. The markets show that it will gradually reduce from 1.5% to 1.25% in August and in 2020 down to 1%.

Fixed Interest Rates are HUGELY popular right now. And they’re only going to become more popular if interest rates continue to go up.

The question is: How do you know if fixed rates are for you? Or if now is a good time to fix? 

 

Fixed Rate Basics

  1. Fixed interest rates (also known as fixed rate home loans) are interest rates that will not change for a period of time, usually between one to five years.
  2. Variable rates can move up, and down depending on a range of factors – fixed interest rates remain static, giving you certainty on the repayment of your loan.

 

Why you might Need Fixed Interest Rates

  • Fixed interest rates are a way to reduce the risk of your loan repayments increasing
  • During the fixed rate period your repayment cannot change for the period set for
    • Regardless of the bank, market or RBA interest rate movements.
    • Great for budgeting future payments

 

When Fixed Rates might not suit you

  • The flip side is also true, so if interest rates decrease in the market the lower rate is not passed onto you, but that’s just the start.
  • Fixed home loans do come with a few limitations when compared to variable home loans.
    • Australian lenders severely limit how much you can make in additional repayments per year.
    • If you got paid a large bonus, received a tax refund or wanted to make additional repayments over the set ones – you will have to pay a penalty.
  • Penalties – break costs: why would you want to break a loan?
    • Interest rates have come down significantly, sold a property and need to pay back the loan
    • Break Cost = Loan amount prepaid * (Interest Rate Differential) * Remaining Term.
    • $500,000 is fixed for 5 years and then is entirely repaid by the customer with 2.5 years
    • The loan was fixed was 5.50% p.a. – current 2.5-year bank rate 3.50% p.a (2% difference) = $25,000
    • If you sell the property, you could violate the loan contract and have to pay the break cost
  • Extra repayments limited
    • Depending on the bank or lender, it is possible to pay extra on your fixed rate loan.
    • Amounts – they range from $5-20k p.a. or $30k over the life of the loan
  • No offset accounts – if you have cash saved up, it won’t offset interest

 

Things to consider

  • Economists sometimes don’t get it right, with certainty they will suggest markets will go up, but in our time we have seen this not to be the case a few times
  • It all depends on international markets

 

Options for fixing your rates

  • 1 year fixed rate – don’t like committing for too long a period for all the reasons outlined above
    • Interest rates could drop over the medium term, you might want to make additional repayments or look at selling your home in the next few years.
    • The benefit is that you will be able to budget around your loan payments over the next 12 months,
    • Rates – The fixed rate market is constantly changing and depends on the money and bond market.
      • Markets think rates will go up, 1 year less than 5 years – RBA indicator – drop of 0.25% 6 months, 0.25% early 2020
      • If markets think rates will go down, 5 years less than 1 –
    • 3 and 5 year fixed rates most popular.
      •  Help avoid any volatility in the money markets. 
      • Get more benefit from fixing for 3 years
        • Similar to variable rates
      • A 5 year fixed rate will give you the highest amount of certainty of your mortgage repayments.
      • Banks can be negotiable longer-term fixed rates
        • Longer-term fixed rates are not suitable for everyone –additional repayments, sell the property or need extra flexibility on your loan like an offset account – it might not be a good idea.
      • As the market has become more competitive banks have brought their interest rate offers closer to one another.

Other considerations:

  1. The cheapest rate does not mean paying the lowest amount of interest
  2. Application and ongoing fees – Cheap doesn’t always mean good with fixed rates
  3. Larger banks will be a bit cheeky and in a bid to make a little extra money when your fixed rate period expires
  4. Redraw facilities – Similar making extra repayments, some fixed rate lenders will allow you to take out the funds as redraw. A word of warning here, while some lenders will let you make extra repayments – some will consider withdrawing the funds as redraw ‘breaking’ the fixed rate contract, and charge you LARGE fees to access your own funds!
  5. Interest In Advanced– This is a terrific product for property investors and allows you to make bulk tax deductions by pre-paying your interest before 30th June. It can be beneficial from a cash flow and interest rate discount perspective, with some lenders giving you discounts of up to 0.20% off their regular fixed rates.
  6. Split loans – Best of Both Worlds – Diversify risk across portions of the total loan

 

A quick word of warning

I’ve said it once, and I’ll say it again – a fixed rate isn’t for everyone.

I fixed my rates a few years ago worrying that interest rates were going to shoot up. And they did, for a few months.

 

Thank you for listening. If you want to get in contact jump onto the contact page here.

Resources:

Resources page – https://financeandfury.com.au/resources/

Bonds and fixed Interest rates – https://financeandfury.com.au/say-what-wednesday-the-skinny-on-bonds-and-fixed-interest/

Property – https://financeandfury.com.au/archive/property/

Interest rates – https://financeandfury.com.au/archive/interest-rates/

Investing in 2019 – https://financeandfury.com.au/archive/investing-in-2019-miniseries/

8 Tax Loopholes, Trump’s tax losses, and thoughts on progressive taxation

Episode 3 8 Tax Loopholes, Trump's tax losses, and thoughts on progressive taxation Welcome to Finance & Fury! Today we're talking about increasing your net income …and the way to do that is reducing tax. So, in today's episode we'll run through why we pay tax,...

Say What Wednesdays: Want to know how to make the most of your money? Find and forge your own path

Say What Wednesdays Want to know how to make the most of your money? Find and forge your own path Today’s episode is just a quick one. I’ll be going over a couple of questions I have had over the past few weeks about the personal finance course we’re launching. Plus,...

Cover your butt! A closer look at diversification

Episode 6 Not all returns are created equal; diversification (and over diversification), correlation and covering your butt Welcome to Finance & Fury! I’m sure that everyone’s heard the saying, “playing it safe” before. And in any game, it’s generally a good idea....

Agenda 2030 – A global conspiracy theory, or something to actually worry about?

Welcome to Finance and Fury, The furious Friday edition Intro ep to a new FF series – probably going to be the biggest Today – episode to give the bird's eye view of the overall topic - massive topic - ranges from education, energy, transportation, medicine prices,...

We are entering new economic and investment territory – An introduction to QE, what does it look like and what does it mean for investments?

Welcome to Finance and Fury We live through transformational times – new environment for finance and investing   We are fast reaching the limits of monetary printing - markets are still trying to work out how to price that in Past model – print money Get GDP growth...

When to refinance and negotiate value

Welcome to Finance and Fury. Today we have Jayden with us, and we will be talking about negotiating with banks and refinancing. Refinancing: Pros and Cons and how to negotiate Bank Valuations Interest rates might go up or might go down.so this is all about asking, is...

Congratulations! You will be able to borrow more money to purchase a property!

Welcome to Finance and Fury Looks like borrowing for property purchase is going to be easier. APRA is looking to make some changes to lending criteria enforced onto the banks. Today: Run through what these changes are Why they are occurring What the lending...

Wisr – Is it a good investment opportunity or is it on its last legs?

Welcome to Finance and Fury, The Saw What Wednesday Edition – Question from Jack This is going to be a bit of a Q&A style episode – he did a lot of research and sent it through – making my job easy on this one – so thank you for that Jacks Question - I wonder what...

Goals for the New Year

Welcome to Finance and Fury Welcome to the new year, depending on when you listen it may be new year’s eve or the new year  Hope you are in for a good night, or not recovering from one. Starting off with a question; looking back on the year, are you in a better...

9 reasons your loan may have been rejected

Episode 38 9 reasons your loan may have been rejected Welcome to Finance & Fury. Today we’re talking about 9 reasons you may have your home loan application declined. We have Jayden Vecchio this episode running through the 9 reasons. As a result of the recent...

Pin It on Pinterest

Share This