# Long-Term Fixed Rate Mortgages - do they exist?



## RichKid (5 May 2006)

I noticed some discussion of 30yr low rate mortgages in the US (I think Tech mentioned it). 

Do similar products exist in Australia for home buyers? I've found some for two to three years fixed rate mortgages but none which are much longer (eg 20yrs), I expect the rates would be much higher than the standard variable rate but still historically low since we are in a low interest rate environment, I thought it would be a good chance to lock in a cheap rate. Has anyone else been thinking the same?


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## RichKid (5 May 2006)

*Re: Long-Term Fixed Rate Mortgages- do they exist?*

Okay, did some _proper_ searching this time and there are a few fixed rate home loans which extend upto 30yrs, some of the major banks have fixed rates upto 10 yrs but then you need to negotiate for another fixed rate and term upto a maximum of 30 yrs total. So if you want a fixed rate for 30 yrs from the outset  there don't appear to be many choices according to the websites, I'm sure though that you should be able to negotiate something better face to face. 

Rates appear to be approx 7.5%+ for 30yrs fixed (just my guess extending from fixed 10 yr rates). I haven't even begun to compare fees and other hidden costs so lots of research to do.


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## clowboy (5 May 2006)

*Re: Long-Term Fixed Rate Mortgages- do they exist?*

Richkid,


Just don't change your mind half way through the term of the loan.  Ie upgrade the house, win lotto and want to pay it out.


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## RichKid (5 May 2006)

*Re: Long-Term Fixed Rate Mortgages- do they exist?*



			
				clowboy said:
			
		

> Richkid,
> 
> 
> Just don't change your mind half way through the term of the loan.  Ie upgrade the house, win lotto and want to pay it out.




Hi Clowboy,

Lotto- that's a problem I'd like to live with! But I haven't considered other issues . Thanks for the tip, I'll search for the fineprint, I'm sure they probably whack some huge fee or something. It's odd that these aren't more popular, as Tech suggests it's a bit of a no brainer as interest rates are cyclical.

The obvious problem is that you have to have cash flow to pay the relatively higher repayments til interest rates rise to match your fixed rate.


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## bvbfan (5 May 2006)

*Re: Long-Term Fixed Rate Mortgages- do they exist?*

With fixed loans you can only make a certain amount of extra repayments without being penalised.
Usually about $10,000

Maybe a split loan, where you fix part and have some on variable might be something to consider


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## Smurf1976 (5 May 2006)

*Re: Long-Term Fixed Rate Mortgages- do they exist?*

Most major banks offer at least 10 year fixed loans.

Generally speaking, you could get these below 7% p.a. interest in the recent past. Some were in the order of 6.6% from memory. Cheaper than variable rates.

The limit on extra repayments is $10,000 per year for some lenders although by choosing the correct loan term and/or having a split loan (part variable, part fixed) problems there can be largely overcome.

IMO anyone with a large debt relative to their ability to service it would be crazy to have a variable rate loan. The risk to reward ratio on potential interest rate moves just isn't favourable IMO. Potential small falls versus far greater potential rises. It's a different matter if your gearing level is moderate or low in which case variable rates might make more sense due to flexibility.


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## RichKid (5 May 2006)

*Re: Long-Term Fixed Rate Mortgages- do they exist?*

Thanks Smurf and BVB, I'm still researching this atm, no imminent plans but will have to decide in due course. I don't want to have to negotiate with someone from an insto who knows more than I do about the products and markets. 

The rates are certainly lower for 10 yrs fixed rate options from the tables on the bank's site. I'll have to keep an eye on the 10k limit, the split option of fixed and variable is probably a more attractive package but that brings timing into it.

I take your point Smurf about people going for variable rates with big debts but most people only think short term, they may even be struggling to pay the lower variable rate so the higher rate is not even an option- basic answer is they shouldn't be borrowing til they're in a better position.


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## tech/a (6 May 2006)

*Re: Long-Term Fixed Rate Mortgages- do they exist?*

Just remember when taking out longterm loans that if you do wish to get out of them then if interest rates are higher there will be no penalty in closing the loan but if lower there will be high penalties.

Youll also find that over 30 yrs you'd be better off on a variable loan than a fixed loan.

There are many varying circumstances for fixed or variable.
I have a mix of both.


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## RichKid (30 July 2006)

*Re: Long-Term Fixed Rate Mortgages- do they exist?*

An article on lenders promoting longer term mortgages, haven't checked if it's fixed or variable rate, I assume it's the former.

--
Warnings over longer mortgages
SMH- July 30, 2006 - 6:56PM
http://www.smh.com.au/news/national/warnings-over-longer-mortgages/2006/07/30/1154198006051.html

Home owners, already facing an almost inevitable interest rate rise this week, have been warned to be wary of new, longer-term mortgages stretching over 40 or 50 years.

GE Money has become the first Australian lender to offer home loans over 40 years instead of the traditional 25 or 30 years.

Major lenders Westpac and the Commonwealth Bank are considering introducing mortgages over 40 or even 50 years.

The longer terms mean borrowers would have lower monthly repayments - allowing people who cannot currently afford a mortgage to borrow money - but they would end up paying more over a longer period.

For example, monthly repayments on a $400,000 loan at 7.25 per cent over 25 years would be about $2890, for a total of $667,368.

Over 40 years at the same interest rate, the monthly repayment would be just under $2560 - but the total paid would be $1,028,170.

Labor said the longer mortgages could increase the nation's already record levels of debt, while Treasurer Peter Costello urged borrowers to be wary.

"Approach with caution a 40- or 50-year loan. It may be that it can give you an advantage, but you have got to take into account that you will be paying repayments a lot longer and could pay more over the life of the loan," Mr Costello told reporters in Melbourne.

The Australian Consumers' Association said the new loans could help first home buyers get a foothold in the housing market but there were also risks.

ACA finance spokesman Dr Nick Coates said borrowers could spend the first 10 or 15 years just paying off interest.

"The longer the loan the more interest you pay to the finance company," he said.

The Reserve Bank is expected to lift interest rates by another quarter of a percentage point this Wednesday following last week's spike in inflation.

It would be the second rate rise in three months and the third since the 2004 election, which Prime Minister John Howard won with a promise to keep interest rates low.

Soaring banana and petrol prices pushed inflation to an annual rate of four per cent last week - well outside the Reserve Bank's comfort zone of 2-3 per cent.

Banana prices jumped by 250 per cent after Cyclone Larry destroyed the north Queensland crop earlier this year.

Mr Howard, who will inspect the crop's regrowth when he tours north Queensland tomorrow, says banana prices should begin to fall in September.

"In three months' time that'll be out of the system because they're not going to go up by the same amount again and they hopefully might have come down a bit," he told ABC radio today.

"So the movement will be in the right direction."

But Labor's treasury spokesman Wayne Swan said inflation had been creeping up since the 2004 election and the public did not believe the government's "banana alibi".

"The pledge was to keep interest rates at record lows, and since that time they've ignored all of the warnings from the Reserve Bank about the capacity constraints in the economy," Mr Swan told ABC television.

"The consequence of that now ... is the prospect of a third interest rate rise.

"If that happens that will be a very big black mark against the economic record of the Howard-Costello government."

NSW Premier Morris Iemma urged Mr Howard to "use his influence" and prevent a rise in interest rates.

But Liberal MP Malcolm Turnbull said Mr Iemma was betraying his ignorance, as the Reserve Bank was completely independent of the government.

Mr Costello refused to be drawn on whether he thought interest rates should rise.


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## Smurf1976 (30 July 2006)

*Re: Long-Term Fixed Rate Mortgages- do they exist?*

Ah yes, increase the term of the mortgage.

I wonder if that's been tried anywhere before? Oh yes, it has! It was the "solution" to unaffordable housing in Japan in the late 1980's.

And how well did it work? Well, the market, um, err, crashed...

Not that anything like that could happen in Australia, right? I mean, it's not as if we've had a massive boom (like Japan), have house prices that keep first home buyers out of the market (like Japan) or have houses selling at ridiculouly high income multiples (like Japan) with incredibly low rental yields, now is it?

Meanwhile, asking prices for houses in the middle suburbs of Hobart seem to be finally breaking out of the range they've been in for the past 2.5 years. Breaking down that is. Admittedly it's only one house (out of 30 for sale in that suburb) but it's about 6% below the lower end of the "plateau" range and about 12.5% below typical asking prices for similar properties at the peak. As for the rest, most houses in that area are asking about 7% less than peak boom prices so it's not just an isolated fall even though it's the biggest one so far.

And if you compare to _all_ 3 bed houses in that suburb, then it's hard to argue that the market is going up when a brick house now is about 12 - 13% cheaper than a weatherboard one of the same size 2 years ago. I've noticed similar things going on in other suburbs too, prices falling a bit and in some cases houses with a flat under selling for the exact same price that would have been asked for those with no flat 2 years ago.

Markets revert to mean valuation eventually. That process is underway with housing right now IMO, at least in Sydney and Hobart. Given the very different nature of these two cities, it's hard to see why others wouldn't join the falls in due course (if not already?).

And this comes before the RBA gives the market another "help" with an interest rate rise...


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## RichKid (1 August 2006)

Great analogy there Smurf with Japan, what's also worrying is that GE is behind this latest scheme, rip-off merchants imo.

Here's another article, with some references to the US and Europe. (btw, didn't think I'd see Indira Naidoo pop up at the Australian Consumers Association, the previous spokeswoman was very good- heard her views several times on TV, it's good to have prominent people who are trusted by consumers being used against the big gun spin doctors but I wonder what her background in consumer choice is?? She is intelligent though, not just another face like on the commercial current affairs programs- she did also appear on 'Under The Grandstand' with Steve Abbot (the Sandman) during the Ashes, good enough for anyone's CV). http://www.smh.com.au/news/business...-cool-reception/2006/08/01/1154198115520.html


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## cuttlefish (1 August 2006)

RichKid - not sure if you already own properties or not - but you'll typically find that after about 5 to 7 years, regardless of whether the prices remain stagnant, fall a bit or rise - that the whole debt thing isn't anywhere near as daunting and will feel like its under control.   In relation to fixed rates - the banks aren't silly so they'll usually err in their favour in relation to any margin on them. Also note that the banks margins on variable rates are still quite high and with proper competition there's still probably room to come down in the margins - so even if the cash rate goes up, margins could still reduce slightly meaning the end rate doesn't go up as much.

I've been caught out with break costs before and its a pain - and again its in the banks favour - once upon a time if you broke a fixed loan when variable rates were higher than fixed, you'd get a refund (because theoretically the bank can take money back thats earning low returns and lend it out again at higher returns) but nowadays you only pay a break cost if you break a loan when variable rates are lower than fixed rates, but don't get a refund if you break a fixed loan when variable rates are higher than fixed rates.

I reckon a 50/50 fixed/var split is the simplest each way bet for a first time property buyer, but if you're stretching yourself and want to make sure you're not exposed to an extreme upward movement in rates you could err on the side of a 70/30 fixed/var split. Personally I wouldn't go more than 5 years, max 7 on any fixed rate loan.  Also even if you want to go fixed, if you leave a small amount variable that gives you room to pay extra off on the loan. (so you could even go a 90/10 split I suppose).

I've gone maority or 100% fixed on investment properties, but I have had the break cost issue with those at times and was glad that the fixed rate ended at the 5 years.  Also worth noting that the break cost is usually payable even if variable rates are the same as fixed rates (again the margin is in the banks favour) - its only when variable rates are a little bit higher than fixed rates that you don't have to pay the break cost.

Also look at the discounts you can get with some of the banks on variable rates. (e.g. westpac professional package gives you a 0.7% discount on variable rates).


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