Beware fixed interest rates, but it’s probably time to fix your rates despite the fact that they are likely to fall some more. What? That sounds like madness. It’s time to fix, but rates are likely to fall some more?
I know it sounds weird, but normal people think all interest rates behave similarly, however, the best test of that belief is to look at business interest rates since the GFC and compare them to home loan rates.
Business people have been asked to pay very high rates while home loan rates fell, and that’s because banks trusted home loan borrowers, but were nervous about recessions and bankruptcies. This confidence disparity between household and business borrowers explained the difference in interest rates.
Don’t wait too long
Right now, fixed interest rate home loan suppliers are out there screaming they have pushed their rates down to numbers like 4.99% for two years. Anyone who has laboured under 9%-plus rates before the GFC knows how good 4.99% sounds.
And given that the Reserve Bank (RBA) could have ended its rate cutting cycle as some economists think, we’re probably close to the end of the fixed rate dropping phase. Sure they could go lower, but not too much lower, and I have found that when it comes to picking the interest rate cycle, you can wait too long and miss out on great deals.
More rate cuts needed
But hang on, you might be thinking, you said earlier that interest rates will probably fall, but now you say the RBA could have ended its cutting — what gives?
Well, while I think we need one or two more cuts to home loans and one or two cash rate cuts would help make this happen, I worry about the conservatism of the RBA. However, the banks are hinting that deposit interest rates will fall because overseas wholesale funding rates are starting to cheapen.
When these rates were very high, local banks chased local savers with attractive interest rates, but these times are over, at least for the moment.
So home loan rates might fall a little, but deposits will fall, possibly significantly, and that’s why stock prices are spiking as cheesed-off savers go looking for dividend-paying stocks to try and get 5% or more return.
When it comes to variable home loan interest rates, the best rate I found was from loans.com.au at 5.09%, which has a comparison rate of 5.12%. The difference reflects the fees that go with the loan, and you should always compare the comparison rate and not be sucked in by the advertised rate. The best rate from a bricks and mortar lender was Newcastle Permanent with 5.37%, which is 5.69% when you throw in the fees.
Let’s look at the three-year fixed rates, and here UBank offers 5.13%, which is only 5.07% on a comparison rate basis. With fixed rates, the comparison rate can be lower than the ad rate — I won’t go into that oddity — but generally they will be higher, so always look out for it.
Newcastle Permanent again is the best of the shop-front lenders with a rate of 5.24%, which comparison rate-wise is 5.83%.
Another issue to consider is application fees. The two loans above have a $0 application fee but the third-best lender — Homeside — has a 5.29% rate, which goes up to 6.13% with added fees, but it has an application fee of $600 as well!
Obviously you have to do your homework and keep your eyes open.
Let’s now look at the five-year rate, and here the best again was UBank with 5.61%, but on a comparison rate falls to 5.29%. Greater Building Society has a 5.59% rate, but it goes up to 5.89% with fees added in. ANZ was the best of the majors with a 5.69% rate, which goes up to 6.14% with fees.
By the way, there are good two-year rates around, but I think that’s too short a period. By the time it ends, rates could be really rising and so you would have to get on the rate-rising elevator with most other Aussies.
Don’t forget this!
With a three-year fixed rate, you could also end the loan deal in a higher rate environment, and that’s why I like a five-year fix, but there is a big but!
When you fix, if you want to get out of the deal, there’s a break fee and it can be expensive. Find out what the cost of breaking is before you sign up.
Also, a lot of people only keep a home for five years nowadays and that’s why a five-year fix could work well.
Finally, some borrowers will fix, say, 50% of their loan, which means they can pay down the other half that is on a variable loan. This cuts any official rate rises in half, but permits you to crush the mortgage when money comes your way. Remember, with fixed rate loans, generally you can’t pay them off at a quicker rate. Once again, do your homework and know the details of the contract. Lots of luck!
Peter Switzer is the founder of the Switzer Super Report, a newsletter and website for self-managed super funds - www.switzersuperreport.com.au