commonwealth

I have approx $300k remaining in my mortgage, and considering fixing a portion of it.

Currently 1-5 yr rates are looking good at below 5%, so I'm thinking fixing $100K for 3 years and $100K for 5 years, and the remaining $100K in variable so I could take full advantage of the offset.

What do you think?

sormesher

We had a mortgage broker come round and he recommended it. He did mention limitations to putting extra money into it and the such like so I would get some advice on the products available before you decide

Beaverstate

I think that in the US you can get 30 years fixed at %3.875.

commonwealth

lol not in Australia.

commonwealth

the reason why i wanted to split is that there's a portion of the loan staying in variable that can still be offset. and some fixed rate loans allow up to $10k extra repayments without penalty.

spouse of scouse

Sounds like a plan to me. Interest rates are somewhat imponderable, so it makes sense to spread the 'risk'.

Buzzy--Bee

I think there is a good chance that the next interest rate change will be downward.

I have never fixed my interest rate and have never wished I had. It's gambling against the bank and they are better at it than you.

My $0.02

BB

Bermudashorts

Me neither, always gone with the standard variable. They don't do those fixed rates to be nice.

scrubbedexpat020

I think the rate would already have gone down had it not been for house prices, now that the RBA is not excited about high aussie. Even though the Americans are cutting back on QE I don't think that they are in much of a hurry to raise rates, especially when Japan and Germany are hiccuping atm. A lot of people are starting to see the black at the end of the tunnel, again. Easy money is here for a few good years yet.
I read The Economist.

FlyingDutchman6666

That's great. Let's see what the venerable Economist has to say about exchange rate predictions:

WHEN it comes to predictions, whom (if anyone) can you trust? Back in 1984 The Economist decided to find out by asking a number people to give their answers to a Christmas quiz on the economic prospects for the next decade. It put the same questions—on economic growth, inflation, the pound-dollar exchange rate and when Singapore's GDP per head would overtake Australia's—to four former finance minsters, four chairmen of multinational companies, four Oxford students and four London dustmen. Ten and a half years later (“Garbage in, garbage out”, June 3rd 1995) their answers could be compared against the actual outcome.

No prizes for guessing who did best according to a scoring system that awarded four points to the most accurate (or least inaccurate) answer to each question, three points for the second-best and so on. The London dustmen came joint top with the company chairmen. The finance ministers came bottom.

FlyingDutchman6666

In fact, The Wolf of Wall Street formulated it much better than The Economist:

commonwealth

From what I understand, when the banks normally fund their fixed rate portfolio, they essentially lock in the net interest margin (NIM) regardless of future interest rate movements.

e.g. in order to give you a 5-year loan at 5% (their Asset side), the bank will obtain funding and lock in their cost of funds at 3% fixed for 5 years from the wholesale debt market (their Liability side). This is assuming they do their balance sheet risk management in the usual way (through match-funding or interest rate swaps).

So no matter what happens to the actual variable cost of funds in the future, the bank's NIM from your loan will always be ~2%.

I don't think it's entirely accurate to think the bank is hoping to beat you by offering fixed rate loans.

scrubbedexpat020

Could you comment on what I wrote? Add/subtract? Preferably something useful.

john in oz

Hi Commonwealth - Finance Broker here - One of the main reasons to lock in rates is simply so you know what you are paying in the future and can manage cash flows. It also can provide a buffer against future rises but then you lose out on any falls.

With Home values so high and loans sizes increasing all the time - we often recommend fixing a proportion of the loan to protect the client against short term rate increases.

In most cases we work out what the client can pay off the loan and any extra amount they can possibly afford and then apply that over the intended time period. We then allow a bit extra and lock the remaining amount in as fixed.

ie if client can pay off $ 30 k plus an extra $ 20 K being a total of $ 50 K off the loan each year then over 3 years this would be $ 150 K - We then add another $ 50 K to this figure ie total to stay as variable in this example would be $ 200K If loan size is
$ 500 K we would then lock in $ 300 K for 3 years.

When a loan is fixed normally the lender restricts how much extra you can pay off the loan before applying a penalty fee or interest to you loan for doing so. Most lenders allow $ 10 K extra per year but you have to watch out as they may apply a Monthly Limit as well. ie 833 pm if $ 10 K per year.

Banks current strategy is to stop you moving to other lenders who offer low rates by offering cheaper fixed rates. In many cases the true rate after all fees and charges can be an extra 0.5 to 1.0 % above the advertised rate ie advertised 4.8% fixed 3 years with a comparison rate of 5.5% (true rate after fees).

So it is important to review what rates are on offer and how much you can pay off in a certain period before locking yourself in. You may also wish to consider any expected payments coming your way such as inheritances etc. In some cases it may be more beneficial to change lenders altogether but you should seek advice on this and the above.

I hope the above helps in making decisions.

commonwealth

Thank you! how do you rate ING Direct's Orange Advantage and fixed rate loans?