Can you beat banks in interest rate game? Fixed vs variable.

The way I see it, the only way one can beat banks via fixed interest rate is by "luck".

Banks have access to more data and insight compared to a regular person. Banks can predict future interest rates better than anyone. As per bank's calculation at any point of time the offered fixed rate would give bank more profit(or at least same profit) compared to variable rate at that time.

Some home owners may eventually be better off by fixing rates but that's purely by luck. While they may think they made a smart decision fixing rates 2 years ago. The truth is they were just lucky.

Most people mistakenly think they are smarter then they actually are due to dunning-kruger effect.

In order to save money by fixing rate(compared to variable rate) one has to either outsmart banks or just be lucky.

Other reasons I see one would go for fixed rate is so that they can have peace of mind and can sleep better at night or if they need financial predictability due to some special future plans etc. (but this does not mean whey would save money compared to variable rate).

 

I am no expert on bank funding, but AFAIK banks aren't in the business of predicting future interest rates and gambling on the outcome to make their margins. I expect they would be baking in margins through attracting retail deposits (or obtaining wholesale debt) for a particular term e.g. (in a very simplistic form) if they have borrowers taking a large number of 3 year fixed mortgages, they would be looking to pair that with retail deposits of the same term by offering a competitive rate or looking for wholesale funding that is cheap enough to match their targeted margin. In this way, it doesn't really matter if rates go up, down or sideways, they have already baked in their profit over the term of the fixed rate.

So there may be some luck involved with a retail borrower coming out on top with a fixed rate, but you aren't betting against the banks to achieve that outcome.

 

I think we were lucky when we fixed three years ago at 3.6% with no fees for the PPOR - we thought it sounded like a reasonable rate and locked it in. As that rate finishes up in December and we're looking at what out there again, probably go variable for a little while but then fix it again - as you noted, having certainty enables us to plan other things without stressing out about an interest rate rise.

 

You can't beat the banks this way. If you fix, they lock in a margin and they make that profit regardless of what rates do. If you choose variable rates, you pay the margin over their costs as well and they make their profit.

The only way to beat the banks is to pay off the debt as quickly as possible.

 

Even then, Are you really beating the banks? Personally, never saw it as beating them, rather just the cost of doing business/living and being comfortable with our choices.

 

According to Canstar analysis, history shows that borrowers have about a 50:50 chance of choosing the right interest rate. Over the past 20 years, based on the average month-by-month variable rate and the three year fixed rate of the big four banks, there were 116 months when borrowers paid less over three years with a fixed rate and 127 months when borrowers with a variable rate paid less.