Fixed Rate loans..........

@Rolf Latham worst nightmare why?

 

On what basis?? How can it not be protracted?

 

Coming from someone who worked in treasury in financial services, I can tell you this is a one big MYTH.

Banks are not betting against you when you're taking out a FR loan.

When banks lend you a FR loan, they lock-in their cost of borrowing from the market. Their Interest Margin (gross profit) is locked-in when they lend you that money, no matter how interest rates move in the future.

That's the reason why you pay a break cost when you pay out early -- you are compensating them for locking-in their higher funding cost when they lent you money.

 

B

I see, but don't they analyse which direction the interest rates are moving before offering fixed rates? If interest rates are on the rise, would they ever offer fixed rates higher than variable?

 

@oracle What period do you think you'll fix your loans for? I'm tossing up between 1 or 2 years. I can't see the rates going up in the next year so thinking possibly fix for 1 year now and re-fix in a year for another 1 or 2 years (depending on the situation at the time).

Any other thoughts in terms of the fix duration for those intending to fix soon?

 

No. They make gross profit (interest margin) based on the current cost of funds at the time they offer the FR product. Even if rates go down, the bank cannot make any more profit from you because they also already locked in their cost of funds and interest margin when they borrowed the money from the market and/or hedged it using an Interest Rate Swap. The only exception is when they're using unorthodox financial risk management (FRM) and betting on the direction of market, but that is a big NO in FRM because that's a risky mismatch between what they're borrowing to fund their lending.

 

I would prefer a 1yr fix, or wait for a little while. Rates could even go lower than this. The current borrowing costs of the banks still are not fully in line with what the RBA wants (0.25%). The current 3y swap market rate (used by banks as benchmark for their borrowing costs) is still much above that rate.

 

@Waterboy is there any place I can see the 3y swap rate?

 

We use a paid proprietary platform, but this is what I can see free online: Rate Sheet | Direct Broking (This is a NZ website but there is a section for Aus Interest Rates. Disclaimer: I cannot guarantee the accuracy of the information provided.)

 

With the same lender or fresh start elsewhere?

 

Same lender, cba.

 

I was thinking of 2 to 3 years. Have time until 30th March to make up my mind.

Will see how things unfold in next week.

Cheers,
Oracle.

 

Hi @Waterboy whats the delta currently with the 3yr swap rate? I know BBSW is a spot rate it has significantly reduced in last 10 days. Cheers

 

The swap rate isn't relevant to the 1,2 and 3 year rates you are seeing at the moment. The RBA has stepped in and is providing a term funding facility of $90Billion to ADI's at a fixed rate of 0.25% for 3 years. ( This is NOT the same as the cash rate being 0.25% ) rendering the international funding sources traditionally used by ADI's to source fixed rate money, redundant for the time being.

https://www.rba.gov.au/media-releases/2020/mr-20-08.html

Banks /ADI's are allowed to fund only 3% of total outstanding credit this way , so dont make the mistake of assuming these ultra low fixed rates will be available indefinitely at all lenders who have released them in the last 1-2 weeks.
Non Bank lenders /securitised lenders have been offered similar options by the AOFM... ( Australian Office of Financial Management)

https://www.rba.gov.au/mkt-operations/term-funding-facility/announcement.html


This, friends, is why you are seeing cracking 1,2 and 3 year fixed rates come out thick and fast at the moment. Banks aren't sourcing the funding for this money in their traditional international markets.... if they were , rates wouldnt be this low. And while it's never wise to say never, I would suggest it is VERY unlikely funding costs will get much lower, or that fixed rates can get much lower. They are, at the moment, 40-60bpts cheaper than the sharpest variable rates, and the cash rate is 0.25. Do the maths. What are the probabilities of the variable rates dropping 40,50,60 bpts when the cash rate is 0.25 and the RBA has said that's the end of their rope? Again, never say never, but the probability of that is likely to be almost zero, you'd have to think.

 

Ah fixing is so tempting but lose flexibility to sell hmmm....

 

Only if the break costs are high. Can always time it such that the break costs are deductible.