Is now that right time to fix? A “Multipart” dissection of fixed rates…
It’s a great headline I’ll grant you that. A play on words with my business name in conjunction with a discussion of where rates are heading is bound to get a few people’s attention!
The truth of the matter is, no matter what stage of the interest rate cycle we’re in, the discussion point of, “Should I fix my home loan” is always prevalent amongst home owners.
This blog post will seek to reveal the truth about fixed rates and to educate you about whether this is something you need to consider.
How to banks price fixed loans?
To kick things off, I want to break a myth that has, and probably always will exist in relation to fixed rate loans…
That is that banks price their fixed rates loans by guessing where rates are heading into the future.
The fact is, this couldn’t be further from the truth.
I can categorically say that banks do not and never will gamble upon what they think might happen in the future.
A more fitting way to view the banks is as an owner of the casino i.e. the house always wins!
The reality is fixed rates are based off bond markets, which is why you’ll see them move independently of variable rates, which generally only change off the back of an RBA announcement.
What the hell is a bond?
A bond is simply an agreement whereby one party lends to another a set amount, for a set amount of time to get a set return.
The person who is given the money will try and lend that money out in order to get a higher rate of return, thereby making a profit on the transaction.
The interest rates you see on a fixed loan is simply the bank offering a rate they have determined will provide them with a satisfactory return for when their bond expires and they need to pay their money back.
To repeat, it’s not the banks guessing where rates are going and putting a chunk of their money on black, hoping to “beat” the market!
Why should you consider a fixed rate loan?
Based off that understanding, whenever I talk to my clients, the discussion of fixed rates does not come down to them or me guessing where rates are heading. Instead, it should always be based off “if” rates were to go up, would you be able to afford your repayments?
Many of us have now been through the lows of the GFC and the highs of the latest property boom. This means we all have seen first hand that things can turn around (bad, or good) very quickly.
The question is, if it’s a bad direction, do you have the capacity to cope with this?”
If the answer is no, then I always recommend fixing at least 50% of your loan as it will provide you comfort and clarity that if things to turn sour, a good chunk of your home loan will be accounted for.
In summary, remember, banks are not picking where rates are going so neither should you. Instead, it’s important to take an honest look at your family budget and consider whether or not the home loan you are about to go for is a bit of a stretch.
If it is, my answer is undoubtedly, “You probably need to consider fixing a chunk of your loan.”
If you would like to discuss your own financial situation, get in contact with me today by either calling 0400 530 868 or email email@example.com.