Notes to is it worth fixing now

The following notes are out of date and will be updated once rates have fallen a bit! 23rd June 2010

Notes - updated 5th April 2010

How to use these tables

If you wish to compare a five year fixed rate to variable as two options (more posts are coming about this issue), you may be quoted (say) 5.04% for a variable loan and 7.15% for a five year fixed. If you used my figures, your quoted variable rate would be 0.16% lower than your quoted figure (you may want to adjust for fees), so subtract 0.16 from the five year fixed rate to get 7.34% as a reasonable rate. Factoring in an error would be appropriate, so if your preference is to be fixed for five years you might choose to make further enquiries about this. If – instead – your quoted five year fixed was 6.5% – then you might even get a bit excited and make excited enquires. If your quoted rate was 8% – you might choose to stay variable, or look at other fixed terms or other finance providers (but do further research, or check with a financial adviser to get a professional opinion). You may also decide that an extra 1% of so would be worth it for certainty.

Big 4 ave (%)

This is based on the average of the big four lenders (ANZ, CBA, NAB, WBC) taken from their australian corporate websites on the date quoted in the post. The variable rate quoted is the average standard variable minus 0.6% to give an estimate of a basic varaible or pro pack rate.  The 7 year rate is the average of ANZ, CBA and WBC as NAB does not publish a rate for this term. The 15 year rate is just the CBA, as no other lender publishes this term. It is common that lenders provide discounts off their fixed rates on professional packages etc. These rates are the carded rates only (other than the variable).

A key question

If you decide you want to get a fixed rate – there is one key question you must ask your finance provider up front: How much will it cost if after I have fixed I want to close or change my loan again?

It can cost a lot to “break” a fixed rate. I have summarised some issues to consider – see some factors to consider regarding fixing your loan.

Basis of predictions

My models predictions (expecting total humiliation) for Australian variable residential interest rates up to 2025 are as follows:

Cal. Year Ave Disc var rate (%)
Now (for comparison) 6.20
2009 5.46
2010 7.28
2011 8.28
2012 5.68
2013 6.58
2014 6.98
2015 7.88
2016 8.27
2017 8.27
2018 8.27
2019 7.27
2020 5.27
2021 6.77
2022 8.27
2023 8.77
2024 9.27
2025 8.27

The above rates in the table above are what I have predicted as a reasonable interest rate for a variable loan. These figures are averages over a calendar year. (See disclaimer etc – nobody can predict what will happen with rates with any accuracy). I can honestly say that these predictions will be incorrect. I’ll be ecstatic if my predictions for variable rates are accurate to within half a percent on average over the next five years. After this period – these predictions are a lost cause I’m afraid. Interest rates are heavily influenced by the decisions of government bodies, private businesses and individuals (and voters) as a whole. As these decisions cannot be accurately predicted, interest rates cannot be accurately predicted.

Risk premium

Longer term fixed rates have a risk premium embedded in their cost. I have not factored in a risk premium at all, and am not sure this is relevant. So especially 7, 10 and 15 year rates may be much higher than I have noted here, even if the market agrees with my predictions for variable rates.

Other factors

There are many other factors to take into account. Make sure you get financial advice if you plan to act on the basis of this blog. I could be a nutcase.

See . . . what rates might be worth fixing at?

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From . . . www.fixedversusvariable.com.au

This article is not intended as financial advice on any financial product, and obviously cannot possibly have taken into account any special requirements you may have. Speak to an independent financial adviser before making any financial decision.
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