Interest rate - fixed to Variable?

[mick_foley]

18 months ago my mum fixed her Commonwealth bank homeloan for 4 years (silly maybe but at the time it seemed smart). Now with interest rates coming all the way down to 3.25% does anyone know a way she can switch back to the vairaible rate without it costing her a fortune?

 

[Niximus]

18 months ago my mum fixed her Commonwealth bank homeloan for 4 years (silly maybe but at the time it seemed smart). Now with interest rates coming all the way down to 3.25% does anyone know a way she can switch back to the vairaible rate without it costing her a fortune?

There isn't. When she locked it in she agreed to pay that rate for 4 years. Think of it like a lock in contract. By fixing she locked the amount of interest she would pay in that period. Let's say for example that the figure on that interest over 4 years would have been $60,000 and the rate was 9% if the rate is now 6% then the bank will need her to pay-out that difference in interest, i.e. $20,000, the lower the rates drop, the higher the pay-out fee will be. for example hitting 3% loans could make it cost $40,000 to get out of fixed.

It's the risk you take with fixing, if you were able to fix any time and get out of it cheaply then no one would ever pay a higher rate as everyone would fix and if it dropped they would get out and fix again.

 

[wotdoiput]

She can actually break the loan and fixed rate. however that will cost a bit of money in the break costs, depending on what sort of laon she has. Most times it is a percentage of the loan amount plus say $300.

 

[Moo]

I'm getting close to a point where I am going to fix for 3 years.

 

[Bulldog Joe]

While there is a break cost that is substantial, the thing to understand is that you are simply paying the interest you have contracted to pay in advance.

Making predictions is always dangerous but the interest rates may have another 1% to fall, so opting out of the fixed rate and paying the break fee may actually save money as you then get the benefit of any further cuts (if they eventuate).

 

[kenrosewall]

Tell your mum not to worry. Over a 3-5 year cycle, interest rates will average out and she will end up the same as if she had a variable loan that whole time.

She obviously could afford the repayments at the time she took out the loan so still should be able to. No point worrying about movements in interest rates which watching them seems to have become a nation sport lately.

 

[Faithful Hawk]

Tell your mum not to worry. Over a 3-5 year cycle, interest rates will average out and she will end up the same as if she had a variable loan that whole time.

She obviously could afford the repayments at the time she took out the loan so still should be able to. No point worrying about movements in interest rates which watching them seems to have become a nation sport lately.

Yeah I am in the same boat I fixed in Dec 2007 at 7.99%(80-20 Split) for 5 years at the time seemed the way to go. Regretting it a bit now but have done the sums in regards to breaking and is not worth it so will ride it out and look at it again at the end of 2010.

 

[Bodicifer]

Tell your mum not to worry. Over a 3-5 year cycle, interest rates will average out and she will end up the same as if she had a variable loan that whole time.

She obviously could afford the repayments at the time she took out the loan so still should be able to. No point worrying about movements in interest rates which watching them seems to have become a nation sport lately.

Unless you locked them in in the Keating era!

It is a good point you make though. If you were variable at the moment you would be waiting another six months and then shopping around for a long term fixed rate. You might get 10 years at 5.5% or something around the middle of the year and I would be jumping at it. Remember, unless inflation becomes a concern again, rates will remain relatively low.

 

[FFB1]

I'm one of the 43,000 who fixed theirs when the variable was peaking - 8.69% for three years in March last year (so a bit over two years to go). I sussed out breaking my loan but ING quoted me about $8,000 in October, which quickly grew to the low $20's not too long ago..

While it pains me to see interest rates falling, like it would your mum, I am being optimistic.....I am not an expert but heres how I hope it will pan out..

My repayments are $920 a fortnight - if I had remained on variable I'd be paying about $720 a fortnight now - quite a big difference.. That said, if I had remained on variable I would be contemplating fixing it now, probably for five years..... If the economy continues the way it appears to be heading, in 2 years time when I come out of my fixed period rates might (and I say that with alot of hope) be still relatively low - which is when I will fix it for a five year period. At this point in time, those that fixed it now will have 3 years left where I will have 5.. By then I would hope the ecomomy would be improving and naturally interest rates might start to go up, so these people, when they come out of their 5 year period, will start to experience higher rates... I hope you get where I am coming from..

Of course nobody knows what will happen - I thought carefully about fixing and I am kicking myself I didnt when I had the chance to do so at 7.99% - but I thought inflation was going to impact which of course it didnt.

I'd tell your mum to stick it out - as I say, if the economy continues the way it is, when she comes out of her fixed period, rates might still be low so she'll be able to fix it then, while others will be a fair way through theirs...

 

[telsor]

Fixing rates is kinda like taking a bet with the bank about which way interest rates will go. If they go down, the bank 'wins', and just as you wouldn't let them adjust the rate if it had gone up, they're not keen to lose money in order to help you out either.

There are probably ways out, but you'd need to look at the fine print for that.

For those looking at locking in now, it wouldn't be a bad time...You might miss the bottom, but not my so much you'll have too much stress. Personally, I'd give it another few months.

For good or ill, most banks now only allow fixed terms over a certain period....Back in the day, you could have them for the length of the loan, which led to cases like my father taking a loan for the family home in about 1970 at the (then) exhorbitant rate of 6.25% for the life of the loan and the bank offering various deals to unfix it in the 80's when rates were in the high teens. ( all were refused )

 

[rocker_oz33]

l went thou 6 price rises,l was scared the rate would hit the teens so l fixed for 3 years my contract finishes early next year.so l most likely will not be getting a much cheaper rate but you never know anything can happen