# Fix or not to fix home loan?



## Aussiesteve (12 October 2013)

Members Equity now offering fixed interest rate of 4.69% for 3 years. What do people reckon  - a safe bet that variable unlikely to drop below that in the next 3 years?


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## dtraeger (12 October 2013)

Personally, I cant see rates changing much over the next couple of years.

Even if they do, fixed is very inflexible. What happens if you want to get a topup in order to access equity (for further investment or renovation etc) or if your circumstances change and you want to change banks? All of these scenarios have to be considered otherwise it'll be very expensive.


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## sydboy007 (12 October 2013)

seems a decent rate. 

can be split fixed and variable with redraw facility.

were close to ZIRP now, especially in the real world so unlikley interest rates will drop much further.


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## Smurf1976 (12 October 2013)

It comes down to risk - the same principle as any insurance.

On average, the insurer will win. You pay to insure your house knowing that most likely it won't burn down. But you accept a small loss, the insurance premium, to avoid taking the risk of a much bigger loss if it does burn down.

Much the same with fixed rates. Statistically, the bank is likely to "win" but in doing so you have removed the risk to you that rates could rise.

Personally, I always had a variable rate loan simply because I knew that I would be making a lot of additional repayments. Some banks offer the option to split the loan. Eg 50/50 fixed / variable. That way, you can still make additional payments off the variable part if you want to.


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## tech/a (13 October 2013)

Do you expect rates to rise appreciably in the next Three years.
There in lies your answer.


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## againsthegrain (13 October 2013)

tech/a said:


> Do you expect rates to rise appreciably in the next Three years.
> There in lies your answer.




Seems the op is not sure himself so asking others opinions, so not a really helpful reply to him


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## sydboy007 (13 October 2013)

I'd say maybe the best option is to:

* Work out how much you could pay back in 3 years and then add say 10% to that and leave it as variable.

* Fix the rest.

At least that way you're covering both rising and falling interest rate scenarios.

Might be good to check if you can make extra repayments to the fixed balance.  Some let you make a certain $ level, others let you do a certain % of the fixed balance each year.


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## Garpal Gumnut (13 October 2013)

Fix.

You'll never ever see interest rates this low again.

g


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## McLovin (13 October 2013)

Garpal Gumnut said:


> Fix.
> 
> You'll never ever see interest rates this low again.
> 
> g




I agree. I fixed for 5 years. It costs about 25bp more than the current variable rate but I think it's worth it.


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## Bill M (13 October 2013)

If it were me I would fix it too, probably for 5 years. It's the lowest interest rates I have ever seen in my entire life.


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## tech/a (13 October 2013)

Bill M said:


> If it were me I would fix it too, probably for 5 years. It's the lowest interest rates I have ever seen in my entire life.




I think that's the opinion of the majority and nothing wrong with that either it's fact.
But with a push on fixing rates by financial institutions , I doubt they are of the opinion that they want to be nice guys to all borrowers.

My own opinion is that the US of A is at sometime in the future---either volenteraly or forcibly going to stop printing money.
China will still grow but not at the rate we would like mainly due to lack of demand world wide.
Europe still hasn't solved it's solvency issues and they will raise their head again sooner than later.

So while our interest rates are still high relative to other countries.
We will use a lowering of rates to attempt to stimulate our own economy
Financial institutions in my view know this and welcome fixed rates.

Personally I'll be staying with variable unless something clearly indicating a change in macro economics points to an inflationary future.

I am hopeful this expanded answer is of more help to the OP and sways his opinion my way!


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## ROE (13 October 2013)

if you want history as a guide, variable always win in the long run even during high interest period of the 80s 

but fix or not to fix only you can answer...can you handle rate rise? do you want stability of knowing what you paying for the next 3-5 years etc...

I have a theory that interest always drop faster than they going up and stay lower longer than high rate 
which when you add up and divided by time variables always win...


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## McLovin (13 October 2013)

The way I see it, rates can't go much lower. That is to say, the RBA can keep lowering but as long as banks have to borrow from overseas, to supplement their deposits, mortgage rates will not fall much further. So the opportunity cost is pretty low, imo. On the other hand, when the inevitable uncoiling of interest rates occurs in the US, Australian banks will be competing in the same debt markets and their funding costs will rise accordingly, which will push mortgage rates higher.

On top of that, the 5 year fixed rate requires such a small premium over the variable rate and provides a good hedge.


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## Smurf1976 (13 October 2013)

tech/a said:


> Personally I'll be staying with variable unless something clearly indicating a change in macro economics points to an inflationary future.




Agreed in principle. But there is also the risk aspect to it.

My house probably won't burn down this year and if I travel overseas then I probably won't get sick. But it could happen, and therefore I take out insurance to cover the cost. I could most likely save money by not insuring, but doing so involves the risk of a much greater loss if the worst does happen.

I agree that the banks usually win. If they're offering a fixed rate of x % for 3 years then most likely the average variable rate will be less than that. But in saving that money, you are then taking on the risk if rates do rise.

If the OP can't afford a rate rise then fix for as long as possible. If they can afford to pay more if rates rise then stay variable since you'll probably be better off by doing so (but there's a chance that you'll be worse off).

It's a bit like saying I don't take out travel insurance when travelling in Australia simply because I can afford the cost of anything that's likely to go wrong. But I can't afford a huge medical bill in the US or something like that, hence taking out insurance to cover the risk.

Can you afford the risk of rates rising? That's the most important question in my opinion.


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## Aussiesteve (13 October 2013)

Thanks everyone - plenty of good food for thought here!
Cheers


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## skc (14 October 2013)

dtraeger said:


> Even if they do, fixed is very inflexible. What happens if you want to get a topup in order to access equity (for further investment or renovation etc) or if your circumstances change and you want to change banks? All of these scenarios have to be considered otherwise it'll be very expensive.




I used to have a fixed rate loan with 100% offset with Investec. So may be it's worth the OP going to mortgage broker and see if there are other fixed rate providers out there who can offer more flexibility (if that's what you desire). It's probably a good thing to investigate switching before you fix it regardless - I said to my loan manager I am going to a mortgage broker next week and he lowered my rates by a fair bit.



McLovin said:


> I agree. I fixed for 5 years. It costs about 25bp more than the current variable rate but I think it's worth it.




IMO the trend is your friend until it ends. We are in a very slight easing bias still. While domestic numbers don't really support further rate cuts, international issues + high $A probably do. My view is that it will not be too late to fix it when we have our first rates rise, or some strong hawkish wording by the RBA about a change in tact. 

I think if you fix for 3 years chances are the rate will move very little during this period. May be 1 or 2 more cuts over next 12 months, no movement for another 6-12 months and 2-3 rate increases for the last 1.5 years. So overall you might be neutral. But then again, rates can rise quite fast so just need to be prepared to act when the time comes. Over 5 years it gets a bit trickier to predict - got knows what iterations of debt ceiling or QE we'd be facing at the time.

BTW, imo there is no inherent edge in a bank's estimate of forward interest rate movements. So you are not automatically worse off with a fixed rate as if the house always wins. But with fixed products the bank locks you up as a customer for the next 3-5 years. They can cross-sell/up-sell and do away customer acquisition costs (which are very high). So they may offer you a discount for fixed products even if they make a bit less on the loan product itself, as they can generate other businesses from you other ways and still be ahead overall.


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## kid hustlr (14 October 2013)

skc said:


> I used to have a fixed rate loan with 100% offset with Investec.




I didn't know this existed. Very surprised by this one I thought all offset accounts were variable only


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