Quick question for you: do you think a bank would design products to work in their favour, or yours?
Okay, now we’ve reminded ourselves which party a bank will take care of, we can address the idea of fixing.
A fixed loan does a few things you need to be aware of:
- Locks in an interest rate for a certain period of time, usually from 1-5 years
- Requires a break fee be paid if the fixed period is exited before maturity
- Can give the borrower a degree of certainty that their repayments will remain the same during the period
And for a bank:
- All of the above, but point three becomes about them: they get the certainty of fixed income for a certain amount of time giving them confidence to make business decisions based on the income.
- In a declining rate environment such as we were in from 2010-2021 fixed rates would usually be offered at a lower rate than a variable loan
- In a rising rate environment such as we are in currently, rates are offered at a higher interest rate.
Banks love it.
Imagine having billions of dollars as a non-current asset on your balance sheet.
That’s why they promote the shit out of fixed rates and encourage and acquire new business in this way.
Can you see the problems here, without me spelling it out to you?
In a declining rate environment, you risk paying more interest than if the loan remained variable because (in almost all cases I saw) the variable rate ends up lower (often considerably) than the fixed loan. I.e. you would have paid less interest because the average interest rate on variable would be less than the fixed.
Are you following me?
In a rising rate environment, the deal gets worse…
Again, you’re taking a bet that you know the direction of interest rates better than a bank (hint: you don’t) and in the future, at some point, the variable interest rate will rise to such a point for such a period of time to give you a cost advantage by fixing.
There’s more problems…
You’re betting against a bank – bad idea
In a rising rate environment, and assuming, like now, fixed rates are approx 1.5-2% greater than the lowest variable option, you’re going to pay a higher interest rate on a greater principle balance (nerd alert).
I’m not going to do the math but if you’re keen on getting a good deal, this is not the way to do it.
I remember in early 2020 when covid was blowing up, ANZ were quick to drop their fixed rates and run a major advertising campaign.
People were going nuts fixing at 2.69, 2.49% or around that level and then a year later bitching and moaning that fixed rates were 1.79-1.89%. Boo hoo.
Like gambling, when you bet against a bank, the house will always win.
Can I say one final thing here – the rate conversation is so frickin’ dumb. It’s mindless. Thoughtless. Basic. Elementary.
Think about and talk about the things which are under your control.
Creating financial security and wealth is all about credit and money management and definitely not about the price of the money.
Get smart. Book a call with me to find out why our Clients are getting wealthy, while everyone else is worrying about interest rates.
Nuff said.
Brodie Brown
Professional Mortgage Broker