Hey Stuart,
I’ve got a question for you. I read some of your informative articles on your prosolution website.
One of the articles talked about how borrowers were generally worse off going on fixed rate loans compared to if they went on a variable rate loan.
The issue I had with the statistics used is that they seemed to average out things, without regard for the differences between a rising interest rate trend and a falling interest rate trend.
For example, at the moment, 5 year fixed rates are around 6.3%. Variable rates are 6.5%. Assuming that rates remain stable or trend up during the fixed interest period, wouldn’t the fixed rate borrower come out on top? Or does the research still indicate that the fixed rate borrower loses in this case?
I’m not trying to criticise your article. It’s just that I’m in exactly the situation that I’ve described – I’m thinking of getting a fixed rate loan, and my view is that rates will either stay flat or go up (I may be wrong, and if I am, it’s clear that I’ll lose out on a fixed rate). I’m just keen to get some insight from someone who’s obviously studied this issue.
Thanks in advance
Cheers
MHi M
Thanks for the question. It’s a good one.
I only had access to interest rate data for the last 10 years so my assessment does not take into account full economic cycles. However, if the data get too old then it starts to become irrelevant. For example, it wasn’t until the mid eighties (I think) when Australia started to “manage” the interest rate/cash/bond market. Since the RBA had actively managed this market (i.e. the RBA buys and sells bonds to manage the cash rate) they have become better at it. Therefore, there is some room for argument that interest rates will not return to levels of the early nineties (and before) because we now manage the cash rate and economy better (probably because Liberals are in power but I’m not going to enter into that debate). The long and short of it all is that I think that 10 years is a perfect time horizon to look at.
The reason I did that analysis is to support my hypothesis that lenders consider future interest rate movements when setting the fixed rates. If you choose of fixed rate solely based on the fact that you think you will be better off then essentially you are taking the opposite view of the banks (and their treasury and economics area – which includes the chief economist). Is that smart? Are you better at forecasting rates?
So I did the study and it essentially supported my hypothesis.
When completing the study I used the standard variable rate (currently 6.57%). However, you should be able to get a rate equal to 0.50% less than the standard variable. Taking this into account fixed rates look even worse (historically).
I once worked (in my previous career) with one of Australia’s top foreign exchange forecasters. He once told to me (I’ll never forget it) to forget about forecasting interest rates, foreign exchange rates, etc. Interest rates react to people’s expectations and uncertainly. How can you forecast expectations and uncertainty?
My advice is do not accept a fixed rate solely on the fact that you will be financially better off. History (and common sense) tells us that you will not be better off. However, perhaps at times you might be… but that’s probably only luck.
Anyway that’s just my view… one person. There are many views out there.
Anyone else care to share their view?
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auHi M,
Good topic!
I am definately not going against what Stu has said [
] (especially today Stu)!! however, I feel there is another side to story.For me, “price” is not the only thing to consider. We are HOPING to have several IP’s one day!! If they are all variable, I would be very concerned that all of a sudden, I’d feel like I was “losing control”.
With at least half the loans on fixed rates, I’d know that all I have to budget for is $XX amount each month.
I feel it’s like a good insurance policy to have a mix of fixed and variable loans. Also with the fixed ones, to have a mix of terms.
I’m no expert, just a budgeter.[
]Regards,
Del
That’s a good point Del. There is a point where investors should buy insurance (i.e. fixed rate) to manage interest rate exposure/risk. This is something I definitely support and recommend.
Cheers
Stu
Property & Finance News
at http://www.prosolution.com.auThanks guys, sound advice indeed.
I can’t argue with your logic there Stu – the banks obviously have experts working out the rates so that their risk of losing out is minimised, whereas I have absolutely no qualifications or experience in professionally forecasting rates (if that can be done at all!).
Del – your reason for fixing is also one of my main reasons for considering whether to fix rates, particularly for investment properties. I need to know what I’m up for in the next few years. If I lose out by half a percentage point because of this, I could simply consider that the price for obtaining some certainty, an insurance premium, if you like. I like what you’re thinking – part fixed and part variable.
Cheers!
M
] (especially today Stu)!! however, I feel there is another side to story.
]The topic ‘Fixed interest rates – Question for Stuart’ is closed to new replies.
