How to win the interest rate game: time to fix your mortgage
Date: Nov 28th, 2015
It's time to fix your mortgage. Well, half of it. For three years only. But conditions are now perfect for borrowers to play and actually win the interest rate game. Here are the three reasons:
1. Rates, though the Reserve Bank governor says not soon, are still expected to fall – just before the bottom of the interest-rate cycle is the point fixed rates are cheapest.
2. Fixing today easily slashes 100 basis points off your loan rate (based on moving from the average 5.22 per cent variable rate to one of the lowest fixes) – this gives you a vital four-rate-cut head start if official rates end up falling more than expected. You pocket money immediately – $200 a month on a $350,000 loan – so stand a good chance of ultimately coming out ahead.
3. Fixed rates are the new lender battleground as they look to maintain market share amid a crackdown on investor loan growth – more than a dozen have dropped their fixes in the past few weeks.
Then there's the fact that our biggest banks have thrown out the variable rate rule book – and many smaller lenders have gleefully embraced the anarchy.
This month the big four hiked rates independently of the Reserve Bank by an average 0.17 percentage points, to an advertised 5.61 per cent for owner occupiers. Investor rates are up 0.37 since the first surprise slug in July, to stand at 5.81 per cent. About half of all lenders have lifted similarly.
That's more "variable" than we bargain for – and who knows what's to come. So it's probably no surprise the big banks are seeking to "fix" a problem they've created.
NAB's dropped rates more, the longer the fixed-rate period – by 0.1 percentage points for one year, 0.15 for three years and 0.2 for five years. CBA's also cut its five-year owner-occupier deal by 0.2 versus 0.1 for other terms. ANZ's just cut three years by 0.1 and there's no move from Westpac so far.
Figures prepared exclusively for Money by finder.com.au suggest the difference between the advertised owner-occupier variable rate and three-year fix is largest at NAB: 1.26 percentage points – or five rate cuts. It also has the cheapest actual rate at 4.34 per cent.
That's a monthly difference of $256 on a $350,000 loan. It also removes the need to argue for a case-by-case discount, which I revealed last month is only up to an average of 1 percentage point. If you succeed.
What's more, unlike so many grabs for market share, fixed deals are accessible to existing customers.
The same NAB cuts apply to investors too – but if you're an investor with ANZ, finder.com.au says you can secure an instant 1.39 points off if you fix for three years (just 1.12 if you're an owner occupier). You'll still pay 0.1 more than with NAB: 4.44 per cent (the rate is the same for owner occupiers).
CBA and Westpac are charging investors more than owner occupiers to fix; the former has only reduced fixed rates for owner occupiers.
Why are the big banks doing this? Fixed rates give them nice certainty of income in a more uncertain regulatory and return environment. Plus their interest antics have seen them take a reputational hit – investors and now owner occupiers are all cranky. (Did you hear about the leaked Australian Bankers' Association document last week revealing a planned PR offensive to get back in our good books?)
But if you're already with a different lender, or you're annoyed enough to ditch your big four bank, then you can do better. As usual.
Check out the table of the best five lenders, inset, and notice how there's very little difference between their advertised variable rates and three-year fixes. This is because with smaller institutions, what you see is what you get. You don't have to know about, then try and negotiate, a discount.
Which brings me to my two golden rules of fixing.
One, only ever fix half your mortgage – it's just a sensible hedging strategy that means you'll always partially win. And two, only ever fix for a maximum of three years – interest rate expectations can change dramatically in even that time.
Still, with interest rates at record lows – if the Reserve Bank cut just eight more times we'd be at an official 0 per cent – you don't have much to lose.
Three questions to ask before you fix
1. Can I make extra payments? Some fixed loans now allow this where previously they didn't.
2. If there is an offset account (always a smart move), does it offset 100 per cent of the balance at the loan interest rate? Lenders often try and claw back some of your offset advantage when you fix.
3. If my circumstances change and I need to sell or refinance, what are the break fees? With a fixed rate, you are betting against a bank that you better know the future direction of interest rates. They're allowed to recoup their losses if you break that contract.