Fixed Rate Loans

Fixed Rate Home Loans

Home Loans - Principal & Interest - Fixed Rate

Fixed-rate loans are where the borrower's interest rate and principal and interest repayments are fixed for a set period, usually from one to 10 years, and sometimes longer. These loans commonly revert to the standard variable rate at the time the fixed-rate period has expired, unless "rolled over" for another fixed-rate term (at prevailing fixed rates). 

Should I fix My Interest Rate?

If you believe we are at the top of the interest rate cycle, then now is definitely not the time to fix. According to John Kavanagh of SMH on 25th February, 2008, Chief economist at  AMP Capital Investors, Dr Shane Oliver, says rates will fall next year.  "It is always hard to know where the tipping point is but there are growing signs of mortgage stress that suggest consumers will soon start to tighten their belts and slow consumer spending," he says.  
 
If a borrower is contemplating a three-year, fixed-rate loan, they need the average of the variable rate over the three-year period to be higher than the fixed rate if they are to come out ahead. In the current environment that is not likely to be the case. Some borrowers, such as investors and first-home buyers on low incomes, need certainty in their budgets. For them the extra cost of a fixed rate may be worth it for the security it provides. Think of it as an insurance premium. Oliver says borrowers should take a longer-term view of interest rates when choosing between variable and fixed. "People need to get a sense of where interest rates sit over the long term.  
 
"Economists use a concept called the sustainable cash rate. The cash rate set by the Reserve Bank has a relationship with the nominal rate of growth in gross domestic product and tends to fluctuate around that rate. "The real long-term rate of economic growth is around 3 to 3.5 per cent. If you add inflation to that you get a nominal GDP growth rate of 5.5 to 6 per cent. If you then add the bank's interest margin on top of that you would expect the long-term average for variable home loan rates to be around 7 to 7.5 per cent.  "When rates get below that level it is time to think about fixing. When they get above that level it is probably too late."

"Paul Walker's experience and product knowledge resulted in me securing a fixed loan at an excellent rate prior to the interest rate rises. Thank you. Excellent service, keep it up. I would recommend your service to my friend." Stewart and Mel, Sydney

how fixed rates work

Most people did not understand that variable rate movements and fixed rate movements do not come from the same source. They are certainly linked, but the drivers are totally different. Variable rates are driven by Reserve Bank policy; fixed rates are driven by the views of those that put their money out to the fixed rate wholesale market.

keep an eye on bank bill swap rates

If you really want a good indicator on fixed rates, keep an eye on the movement of the 90-day bank bill swap rates.  When you see these drop and lenders starting to pass the drop on, don't jump in straight away, wait for the market to stabilise and then move. If you Google ‚“bank bill swap rates", you will find pages of sites with this data.

Also keep an eye on lenders and stay in touch with your mortgage broker so you know what is going on. There is huge pressure on Australian lenders to continually compete in any way they can for your business. Fixed rates are a clear target for this.  Lenders love fixed rate specials as they are predictable with very little churn.

Interest Only Home Loans - Fixed Rate - Monthly in Arrears

Fixed rate interest only loans (monthly in arrears) are typically used by investors and offer you the potential protection of a fixed rate but have no requirement for any principal reduction. For those that have owner-occupied debt which they wish to pay off, but still want a fixed rate for their investment, this type of facility is often used. The fixed rate offers peace of mind in terms of cash-flow and you know exactly what your interest amount will be each month during the fixed rate term.

Should you sell your investment during the fixed rate period and want to clear the loan in full, you could be up for fees, depending on where rates have moved from the time you originally fixed your loan.

Interest Only Home Loans - Fixed Rate - Annually in Advance

Annual in advance interest only fixed rate loans have the same advantages as the monthly in arrears fixed rate home loan, but offer a significant tax advantage. The best way to describe how this loan works is with an example.

An investor purchases an investment property in March and has a loan of $300,000. Initially, she decides to leave it on a variable rate LOC and during the month of June decides to fix it for 3 years with interest payments annually in advance. For that financial year, she will have the interest he paid on the LOC (line of credit) from March to June and the interest in advance (relating to the next financial year). This has given the investor 16 months worth of interest deductions for that financial year, even though she has only owned the property for 4 months of that financial year. Thereafter, it will remain a normal 12 months worth of deductions each financial year.

The fixed rates for interest in advance facilities are always less than the fixed rate interest only monthly in arrears facilities and herein lies the economic advantage.

It is important to note that paying your interest in advance is not a tax minimisation strategy, but rather a tax deferment strategy ie your tax bill is the same as if you paid monthly but the deduction is bought forward by 12 months. This is a great set-and-forget arrangement. You pay the interest upfront and then nothing else is required for the next 12 months.

Talk to your accountant about the suitability of this kind of arrangement for your situation.

Fixed Rates - Pros and Cons