Interest Rates

Variable Vs Fixed Interest Rates

Did you fix your Interest Rates?  Many people fixed at the top due to the fear they may go higher. Some people took out fixed mortgage rates on half their loan. As it turned out remaining on variable would have been better. But no one had a crystal ball and it all happened so fast that by the time even the quick people had made a decision it was too late in most cases to avoid payout fees.

People often ask mortgage brokers about fixing interest rates or staying variable. A mortgage broker can not advise on what to do, however the evidence shows that over a 30 year period you are better off with variable.

Consider Fixing when

A) You can not afford rates to go up because

1. No extra money
2. Having a baby and therefore less income
3. Changing to a lower paid job or less hours

B) If it causes you too much stress to live with the uncertainty

C) Interest Rates are at historical lows (however picking the bottom is still a game)

 

Refinancing

If you are trying to refinance to a variable loan that is a lower rate then your current rate then you will often be hit with huge exit fee’s. The difference in changing loan rates from 6% to 4% over five years on a $200 000 mortgage is $20 000 in interest. So the banks will charge you more than this to refinance to lower Interest Rates.

Mortgage interest rates are at historical lows all around the world. Great if you own investment property as they are likely to be positively geared. Bad if you have money in the bank and want to live off the income.

World Changes

America     (federal funds rate)  2.0%-0.25%     August 08 –March 09       (1.75% drop) 

Australia    (cash rate)              7.25 – 3.25%   September 08- March 09   (4% drop) 

 “The Reserve Bank of Australia has cut the cash rate further and faster, and to a lower level, than in living memory,” Mr Wayne Swan.

UK            (bank rate)              5 – 0.5%         September 08- March 09    (4.5% drop)

Europe  (marginal lending rate)  5.25%-2.5%    September 08 - March 09   (2.75% drop)

 

Historical Changes


Interesting how in most cases when there is a step drop this is followed by a time of no change or slow increase. Also a steep rise is followed by a plateau. This drop has been incredibly fast. What does this mean for the future? If it follows the past then history suggests a plateau over the next few years in Interest Rates.