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What’s better: Fixed rate or variable rate home loan?

ACTResident 22 July 2015 65

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I am going to borrow home loan from the bank and have three options: fixed rate, variable rate and half and half.

Would you please advise here what option I should take. You are welcome to comment on ‘owner occupier’ or ‘investment’, and three different options because your comment may benefit others even if it does not directly apply to my situation.

My idea is to fix the rate as I see the interest is very low now, but who knows it might go further down. I do believe we have economists out there.

Thank you for your comments and sharing ideas.


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What’s better: Fixed rate or variable rate home loan?
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VYBerlinaV8_is_back 12:34 pm 23 Jul 15

Ezy said :

All of this talk is unsettling for me as I am looking to purchase a property to live in.

If only I had a crystal ball to look into the future and see if any of this housing bubble bursting, recession, interest rates rocketing up etc will happen. I might look at renting for a while to see if any of this plays out.

The Canberra market has been flat for at least 4 years. Houses (not units) are in short supply, especially in desirable areas. The price of building new is huge.

We not in a bubble in Canberra. If anything, I think we’re getting toward the end of our stagnation period with perhaps a year or two to go, and then you’ll see property prices rise strongly.

Others have a different view. I guess what you have to work out is what your longer term aims are and work towards them.

Ezy 12:15 pm 23 Jul 15

All of this talk is unsettling for me as I am looking to purchase a property to live in.

If only I had a crystal ball to look into the future and see if any of this housing bubble bursting, recession, interest rates rocketing up etc will happen. I might look at renting for a while to see if any of this plays out.

Holden Caulfield 10:38 am 23 Jul 15

dungfungus said :

Holden Caulfield said :

Only ever fixed my rates once. And then the GFC happened.

FML.

“FML.” ?

http://lmgtfy.com/?q=FML

rosscoact 10:37 am 23 Jul 15

MarkE said :

Here is a question for everyone: What do interest rates have to rise to before your mortgage bankrupts you?
The Australian RBA is nothing more than a bit player in the interest rate world.

I’m in the fortunate position of not having a mortgage but had one through the late 80s so I know what 17% looks like and it’s not pretty. The effect is that it pushes house prices down as people get out of mortgages. Arguably a good thing in these times.

chewy14 9:26 am 23 Jul 15

dungfungus said :

Holden Caulfield said :

Only ever fixed my rates once. And then the GFC happened.

FML.

“FML.” ?

Fixing (rates) is My Life!!*

*may or may not be accurate

dungfungus 9:15 am 23 Jul 15

Holden Caulfield said :

Only ever fixed my rates once. And then the GFC happened.

FML.

“FML.” ?

MarkE 9:46 pm 22 Jul 15

Fix your rates for as long as possible. The Central Bank experiment with low rates is coming to an end as they discover the market is bigger than the Central Banks. The ELEPHANT IN THE ROOM of interest rates is the US Bond market. When did a 30 year bond at 2.11% coupon rate look like a good investment? This market is so over priced that when it crashes world interest rates will move up considerable and quickly.

Here is a question for everyone: What do interest rates have to rise to before your mortgage bankrupts you?
The Australian RBA is nothing more than a bit player in the interest rate world.

vintage123 5:27 pm 22 Jul 15

Holden Caulfield said :

Only ever fixed my rates once. And then the GFC happened.

FML.

OUCH.

Just had a look at the latest fixed options, minisculey lower than variable. Tells me that the standard variable should go down within next couple of months. The RBA cash rate should drop 25 basis points. What the banks do however will be dependant on how they interpret APRAs revised rules regarding capital holdings. If RBA cash rate drops 25 basis points, banks will probably drop the variable rate by 10 basis points for variable and leave fixed where they are.

Holden Caulfield 4:29 pm 22 Jul 15

Only ever fixed my rates once. And then the GFC happened.

FML.

vintage123 3:42 pm 22 Jul 15

VYBerlinaV8_is_back said :

vintage123 said :

VYBerlinaV8_is_back said :

dungfungus said :

Lock in the fixed rate as soon as you can – interest rates are about 4% now so they can only go another 4% lower – on the other hand, if they go 4% higher will you be able to handle that?

I don’t think rates can go much below about 3%. Even if the rba sets rates to zero, there’s still cost of business, admin, risk and profit margin to be had.

That said, I think 4% rates represent a once in a generation opportunity.

I have never utilised a fixed rate. Instead I utilised the loan period. Remain variable to ensure you have the lowest rate of the day. If rates start to trend higher, it usually takes a period before they pass the fixed rate, which at that point I negotiate with the bank to alter the loan period, say from 25 to 30yrs, or 35 to 40yrs, which thereby either maintains the current repayment irrespective of a rising rate, or in some instances reduces the repayment.

Fixed rates have maximum limits on additional repayments.

Fixed rates can surprise you with mortgage shock upon the rate period ending.

It’s easier to build capital with a long period variable rate, if you can pay extra into it. It also allows access to redraw for those opportunities which may create more wealth, I.e forex or shares etc.

Normally I’d agree, but I fixed my rates for the first time ever 2 years ago because the bank was doing fixed (3 yrs) for half a percent cheaper than variable. Over the last two years variable has gradually come down to be almost the same as fixed.

When fixed is more expensive than variable then I agree, but when fixed is cheaper, fix a part and leave a portion variable to pay down quickly.

If the fixed rate is lower than the variable, 9 times out of 10, it indicates that the variable is heading down. If the fixed rate is higher than the variable, 10 times out of 10, the rates are going up.

Fixed rate loan contracts are tight and allow little flexibility, if in the case your situation changes. You pay through the nose in convieniance just to have a tiny bit better deal for a little period of time. If you need to refinance or alter arrangements it is more difficult to do than a variable loan.

You wont find a great long term deal for a fixed loan. Banks usually peeter out with anything worthwhile more than five years.

VYBerlinaV8_is_back 2:32 pm 22 Jul 15

vintage123 said :

VYBerlinaV8_is_back said :

dungfungus said :

Lock in the fixed rate as soon as you can – interest rates are about 4% now so they can only go another 4% lower – on the other hand, if they go 4% higher will you be able to handle that?

I don’t think rates can go much below about 3%. Even if the rba sets rates to zero, there’s still cost of business, admin, risk and profit margin to be had.

That said, I think 4% rates represent a once in a generation opportunity.

I have never utilised a fixed rate. Instead I utilised the loan period. Remain variable to ensure you have the lowest rate of the day. If rates start to trend higher, it usually takes a period before they pass the fixed rate, which at that point I negotiate with the bank to alter the loan period, say from 25 to 30yrs, or 35 to 40yrs, which thereby either maintains the current repayment irrespective of a rising rate, or in some instances reduces the repayment.

Fixed rates have maximum limits on additional repayments.

Fixed rates can surprise you with mortgage shock upon the rate period ending.

It’s easier to build capital with a long period variable rate, if you can pay extra into it. It also allows access to redraw for those opportunities which may create more wealth, I.e forex or shares etc.

Normally I’d agree, but I fixed my rates for the first time ever 2 years ago because the bank was doing fixed (3 yrs) for half a percent cheaper than variable. Over the last two years variable has gradually come down to be almost the same as fixed.

When fixed is more expensive than variable then I agree, but when fixed is cheaper, fix a part and leave a portion variable to pay down quickly.

vintage123 1:50 pm 22 Jul 15

VYBerlinaV8_is_back said :

dungfungus said :

Lock in the fixed rate as soon as you can – interest rates are about 4% now so they can only go another 4% lower – on the other hand, if they go 4% higher will you be able to handle that?

I don’t think rates can go much below about 3%. Even if the rba sets rates to zero, there’s still cost of business, admin, risk and profit margin to be had.

That said, I think 4% rates represent a once in a generation opportunity.

I have never utilised a fixed rate. Instead I utilised the loan period. Remain variable to ensure you have the lowest rate of the day. If rates start to trend higher, it usually takes a period before they pass the fixed rate, which at that point I negotiate with the bank to alter the loan period, say from 25 to 30yrs, or 35 to 40yrs, which thereby either maintains the current repayment irrespective of a rising rate, or in some instances reduces the repayment.

Fixed rates have maximum limits on additional repayments.

Fixed rates can surprise you with mortgage shock upon the rate period ending.

It’s easier to build capital with a long period variable rate, if you can pay extra into it. It also allows access to redraw for those opportunities which may create more wealth, I.e forex or shares etc.

dungfungus 1:49 pm 22 Jul 15

VYBerlinaV8_is_back said :

dungfungus said :

Lock in the fixed rate as soon as you can – interest rates are about 4% now so they can only go another 4% lower – on the other hand, if they go 4% higher will you be able to handle that?

I don’t think rates can go much below about 3%. Even if the rba sets rates to zero, there’s still cost of business, admin, risk and profit margin to be had.

That said, I think 4% rates represent a once in a generation opportunity.

Central Bank rates are already at zero in many countries and few banks are offering rates above 3% (cash at call) in Australia at present. It shouldn’t be ignored that none of the money printing and lowering of rates has helped anyone anywhere, and all that has happened in Australia is retirees’ wealth has been eroded and a housing bubble has been created which will have disastrous consequences.
BTW, when will the government or the opposition come clean on admitting Australia’s sovereign debt can never be repaid? Neither side has even a credible plan to get the budget into surplus.
We are another Greece waiting for the pain.

vintage123 1:44 pm 22 Jul 15

vintage123 said :

Variable with unlimited extra repayments, weekly repayments with monthly interest calculation, with a loan term of 45 years with no penalty for early payout. This is the quickest and best way to build equity and increase further lending capacity.

The above was for owner occupied.
For investment, use an interest only investment loan, packaged with your salary and the rental income minus expenses to be negative geared.

In scenario one I paid off my house in 6 years. With scenario two I purchased multiple investment properties never more than $100 a week out of pocket. I was able to secure each next investment property at around 12 month intervals due to the Net gain in tax savings, nil tax on rental income, and a robust depreciation schedule. I did however lever my PPOR for the investment capital, so it is important to build that initial capital and the way to do that is at point one.

arescarti42 1:33 pm 22 Jul 15

dungfungus said :

You may be correct about further interest rate cuts in the next 5 months but I have a contrary view to yours as I believe that as soon as the China bubble pops there will be a flight of capital out of Australia like we have never seen before and the Aussie dollar will plummet to .60c or lower which will have the RBA intervening by raising interest rates.

The resulting cost increases from imported goods (petrol and almost everything else) will feed inflation which will be already be growing from tax increases (GST is a cert. to go to 15%).

I won’t venture an opinion as to what will happen to the housing market but if I were contemplating buying I would wait until next year.

The entire Australian economy is basically a huge leveraged bet on China, so when China goes, so does Australia in a very big way.

I also expect the AUD to head into the 60s (and probably even the 50s and 40s), but I suspect the economy will be in such a poor state that no one will be spending, aggregate demand will be stuffed, and inflation won’t be a problem.

Remember, the RBA wants the AUD much lower than it currently is, Australian wages, manufacturing and service exports might actually be globally competitive at that level, and would help drive an export led economic recovery. Even if a lower AUD does cause some cost-push inflation, the RBA will “look through” it, they won’t raise rates and smash demand further.

VYBerlinaV8_is_back 1:01 pm 22 Jul 15

dungfungus said :

Lock in the fixed rate as soon as you can – interest rates are about 4% now so they can only go another 4% lower – on the other hand, if they go 4% higher will you be able to handle that?

I don’t think rates can go much below about 3%. Even if the rba sets rates to zero, there’s still cost of business, admin, risk and profit margin to be had.

That said, I think 4% rates represent a once in a generation opportunity.

dungfungus 12:03 pm 22 Jul 15

arescarti42 said :

I’d probably go variable.

Interest rates are already pretty low, but they’re likely to go even lower as Australia’s economy continues to falter and head towards recession.

The RBA will probably cut rates again, maybe twice, before the year is out.

You may be correct about further interest rate cuts in the next 5 months but I have a contrary view to yours as I believe that as soon as the China bubble pops there will be a flight of capital out of Australia like we have never seen before and the Aussie dollar will plummet to .60c or lower which will have the RBA intervening by raising interest rates.
The resulting cost increases from imported goods (petrol and almost everything else) will feed inflation which will be already be growing from tax increases (GST is a cert. to go to 15%).
I won’t venture an opinion as to what will happen to the housing market but if I were contemplating buying I would wait until next year.
Lock in the fixed rate as soon as you can – interest rates are about 4% now so they can only go another 4% lower – on the other hand, if they go 4% higher will you be able to handle that?

VYBerlinaV8_is_back 11:04 am 22 Jul 15

I’d split half and half, as some providers are offering lower fixed than variable. Focus on paying down the variable component as quickly as you can, as early gains multiply out over time. The benefit you receive from paying down your loan faster (ie reduced future interest) is also non-taxable.

arescarti42 10:46 am 22 Jul 15

I’d probably go variable.

Interest rates are already pretty low, but they’re likely to go even lower as Australia’s economy continues to falter and head towards recession.

The RBA will probably cut rates again, maybe twice, before the year is out.

vintage123 9:27 am 22 Jul 15

Variable with unlimited extra repayments, weekly repayments with monthly interest calculation, with a loan term of 45 years with no penalty for early payout. This is the quickest and best way to build equity and increase further lending capacity.

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