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/

If you think that you’re a victim, you are really your own oppressor! Building wealth and demand in an Inclusive System

Furious Fridays If you think that you’re a victim, you are really your own oppressor! Building wealth and demand in an Inclusive System Welcome to Furious Fridays! Make sure you’re caught up with last week’s episode about the system and what it should provide System -...

Goals and Risk profiles, and Philosophy and Strategy workbook guides

Welcome to Finance and Fury Today we will be going through the workbook itself How to put the goals and risk profiles together How to work out the investment philosophy and strategy How to put together the investment plan and checklist Three downloads - Found on the...

Furious Friday: The centralisation of power and control of the economy

Furious Fridays The centralisation of power and control of the economy Last Friday we looked at the stock market crashes of 1907 and 2008 Difference between them was the crash of 1907 had no intervention by any central bank in the USA – because no central bank...

All that glitters: How precious metals, like Gold and Silver work as alternative investments, and how they fit into an investment portfolio.

Episode 34 All that glitters: How precious metals, like Gold and Silver, work as alternative investments, and how they fit into an investment portfolio. Welcome to Finance & Fury. Today we’ll be running through some alternative assets – precious metals, like Gold...

Does Democracy incentivise demand side economics?

  Welcome to Finance and Fury, the Furious Friday edition I have identified a thread through history in the emergence of demand side democratic societies. Where there is a centralized authority, there is a need for ever increasing demand of the mobs and its path...

Are our Lithium companies at risk from South America?

Welcome to Finance and Fury, the Say What Wednesday Edition Today’s question from Zed “I recently noticed that Australia seems to be opening lots of lithium mines as the demand for Electric Vehicles rises and we turn away from oil. Is Australia at risk of their...

The Lucky Country isn’t what most think – A look back in history on how we are destroying our own luck

Welcome to Finance and Fury, the Furious Friday edition A reminder of how lucky we are and why we are called the lucky country. Also, what we have to lose if we neglect to remember this Some perspective: You don’t know what you have until you have lost it Taking...

Cash rates decline – but will your mortgage repayments? As your savings rates certainly will!

Welcome to FF – RBA cash Rates are lower now – talk about flow on effects Today – Will you get mortgage cuts, how your savings will be affected, effects on the job market and wages.   Mortgage cuts Don’t expect the banks to pass on the Reserve Bank’s rate cuts in...

We’re back

Start here We're back! We're back! Sorry to keep you waiting for quite some time, but our absence hasn’t been wasted. As you can probably tell the podcast looks a little different, but don’t worry, you’re not lost. To help avoid any further confusion this is a quick...

Furious Friday: Do you work full time? Are new tax cuts only going to the “top end of town”? Is this “selling Queenslanders out”

Furious Friday Do you work full time? Are new tax cuts only going to the “top end of town"? Is this "selling Queenslanders out"? Welcome to Furious Friday… The Tax Bill has Passed…Yay! Now, let’s clear up a little misconception floating around, we’re going to talk...

Pin It on Pinterest

Share This