Refinancing Home Loan : Fixed or Variable

[PottSie2]

Hi all,

You hear horror stories of people who fix loans just before rates drop, well I am one of those.

Took out a $430K mortgage 5 years ago:
- 100K variable
- 330K fixed for 5 years @ 8.14% ....

single income (wife works part time), 3 young kids and will be on single income for probably another 5 years. We've managed to pay off a bit in advance, but still have 370K remaining.

Took out the loan before 2 rate rises, but then the GFC hit and rates hit all-time lows ... yay. Took the fixed portion/length as we were starting our family, and needed the security of known payments.

Fixed portion is finishing in March, but just wandering what we should do this time.

Just doing a quick comparison, there are 5 year fixed rates @ 5.7%, just above what appears to be an average of 5.5% variable.

Now, considering our fixed repayment has been approx $2500 per month, and even dropping to 5.7 will save us (or allow us to pay off an extra $500 per month), the fixed rate looks a good deal, and am seriously considering locking in at least 1/2 this time.

Questions:
- Am I being a goose again ?
- Will banks ever bring their cash rate in line with the RBA's ?
- Do you forsee many further RBA cuts ?

Your expertise is appreciated.

 

[TigerCraig]

Best thing is to work out how much you can afford to pay off the principal over the next 3 or 5 years. Keep this portion (or about 120% of it) as variable. That way you can pay it off without penalty - paying off a fixed rate early will cop a penalty. Fix the rest for the term that you are happy with. 5.70% is a historically low rate and even if it goes a bit lower, it is good insurance with a large debt and single income.

There will probably be around 0.5% more in cash rate cuts I think. How much gets passed on is questionable as pressure is hitting the deposit side of the book.

Remember that the RBA rate is for overnight cash - the banks would be happy to charge you only the RBA rate, if you would be happy for them to call up the loan on a days notice

 

[Visions]

As a mortgage broker I get asked this question all the time. The advantages of fixing are that it gives you certainty with the repayment amount so it is good from a budgeting point of view. The big disadvantages are firstly one that you have seen first hand in that if interest rates drop then you are paying more than you would otherwise with variable, and secondly if you break the loan within the fixed rate term you could be up for some huge break fees.

Taking the above into account, the big question you need to ask yourself is whether you intend on getting rid of your property (and thereby your loan) in the next few years for any reason, i.e selling to upgrade to another home, decide you want to rent instead, etc. If so, better off not to fix.

If you're intending to stay in there long term, then fixing might be a wise option. No one can predict what will happen to interest rates long term, but if you are looking at it purely from the current moment in time perspective, it would suggest that rates are close to the bottom of the cycle for the short term. There might be a few more rate cuts which could drop variable rates into the high 4% mark but even so fixed rates in the mid 5's looks cheap.

Then again fixed rates looked cheap a few years back and the GFC hit.

I have a memo type guide I received from COSL on the various pitfalls on fixed rate loans that borrowers normally aren't aware of and/or what can be done with fixed rate loans. If you want a copy, PM me.

 

[ilikebread]

Hi all,
Questions:
- Am I being a goose again ?
- Will banks ever bring their cash rate in line with the RBA's ?
- Do you forsee many further RBA cuts ?

In answer to your questions, trying to second guess what the banks or the RBA are going to do is a mugs game. Workout what you can afford and what you think your financial situation will be like down the track. This will give you the best indicator of how best to structure your debt.

I did the same thing as you and also got a loan for our house just prior to the GFC (when interest rates were headed for 10%). We fixed about 40% of our total loan amount and left the rest as variable. We did this because we did not want to get hit with any fees for paying off our debt early and we knew that we would be able to pay off a good chunk of the variable portion within the next 5 years. We also didn't want to get caught out paying 10% or more, as per the so called "experts" predictions back in 2007. Lucky I listened to them because I ended up paying 7.55% PA for 5 years /sarcasm.

It was after the GFC hit that I really became interested in money and wanted to learn as much about finances as possible. I also was so disillusioned with all the terrible experts on the TV who always got it wrong, and no offence to Visions as a mortgage broker, but it also seemed as if the the mortgage brokers were only interested in signing you up to a bank that they got affiliate commission from rather than finding you the best deal. It seemed like everyone had their own agenda and you just couldn't trust anyone but yourself. Just look at Wayne Swan if you want to see how poorly the experts are able to manage money and predict the future...

Anyway, 5 Years after we got our loan we have paid off almost all of our variable mortgage and have started to really lay into the fixed loan portion (Because the fixed loan was a 5 year loan we were unable to put much extra in without getting hit with fees).
If you are interested you can check out my debt progress over at my blog which I update regularly - http://www.monsterpiggybank.com/paying-off-debt

Obviously everyone's finances are going to be different and so what works for me may not be what will work for you. If I was you I would review my budget and see how much money I have to play with, if it isn't much then fixing might be the answer, as you won't want an increase in interest rates to hurt you. If you think you can pay off lots of debt quickly then a variable loan sounds like it might be a goer. If you are somewhere in between then perhaps doing a split variable and fixed loan would be ideal.
Without a budget and a good idea of where your money is going then it is really just a guessing game, which is not something I like or something I am used to dealing with.

Of course the experts will tell you to consult with a financial advisor, and as I'm no expert, perhaps that would be the best course of action for you.

 

[Moo]

I'd say there is at least .5% to come in 2013.

If you are staying in this house, just crunch the numbers...they will tell you the right path.

 

[Papa G]

Wait a couple of months (actually March I think will be perfect) then fix half the loan for 5 years at what I'd expect to be around 5.5%. The variable rate may drop lower than this but I'd expect it to start rising again in the next 12 months.

5.5% is historically very low and for 5 years you can almost forget about that portion of the loan. Having a smaller Variable amount of $185,000 I reckon gives you a pyschological edge over the loan as well. If you continue to pay your $2,500 a month you will see this part of the loan diminish significantly over the next 5 years, whereby you may even be in sight of getting rid of this part of the loan altogether over that time.

Just a theory mind you, but I did a similar thing back in 2003 where from memory I locked in a fixed rate of around 6% for close to half my loan and I found what I described above to work for me.

 

[Scotland]

An important thing to get your head around if you fix all or some of your loan (not so much for the OP who has already done it previously) is that fixed rate loans are less flexible than variable rate loans. Yes you'll have a lower interest rate for some/all of the fixed period and you won't have to worry about changes to your interest payments, but if you come into some money and want to whack a chunk off the loan or get a new job and want to increase/decrease monthly payments banks or you want an offset facility tend to be more of a PITA with fixed loans than with vairable.