Is it even worth fixing? VS variable.

So I'm just taking CBA's as an example:

• 3 years Fixed P&I: 4.64% p.a. Comparison rate
• Variable P&I with 80% LVR: 2.30% p.a. Comparison rate

Even if RBA raise the interest 2% by end of 2022, that's still not 4.64%.. not to mention you would've paid 6 months of high interest.

Am I missing anything here? Please enlighten me if I did. Thanks.

 

3 year bond is currently 3%. Which is what the banks would hedge to. Therefore, if they want to make 2% gross margin, to cover operation cost, potential losses and hedge cost etc. Customer will pay all up 5%. Bank will likely make less than 1% net profit.

So the 4.64% will be thin profit.

 

Traditionally fixed was ALWAYS repeat ALWAYS higher than variable. What your seeing now is just a normalisation of the market.

Right now I probably would not fix anything. Your right that the difference banks are now quoting with their fixed vs variable its not worth it. Your variable within the next 3 years may never get to those rates at all.

The best time to fixed is long gone now. You should have fixed them all 6 months ago. My old man fixed 11 loans with CBA at 2.19% until 2024.

All of this is just the markets normalising the rates from emergency rates.

 

Agreed with the above. Fixed rates were only so cheap becuase the GOVT were buying these bonds at a low price that we would probably never see again.

If the spread between fixed and variable werent so far apart then you could have considered fixing it, but now fixing a loan is just a hedging mechanism if you believe variable will increase significantly.

 

The only reason to fix is to give you the certainty of what your minimum repayments will be for the next few years.

If you can comfortably afford to make repayments as if your rate was 4.64%, then you might be better off to stick with variable but make higher repayments (as if the rate was 4.64%, or higher). By the time variable rates reach 4.64%, you should be well ahead in your repayments, have saved a lot of interest and have a decent buffer of funds available as redraw. Speak to a broker to discuss your specific circumstances.

 

Fixed rates were low as the cash rate for 0-90 days bills on the bank bill swap market inferred low rates. This has moved out. The price setting for 1-2 years is closely tied between cash, BBSW short term swap rates and then futures contracts for forward contracts for short terms bills out to up to 5 years. Bond arent used at all. There can be arbitrage in bond pricing but it tends to be the bond market (3yr T-Bonds, 5yrs etc ) that corrects not the other way. The mug borrower wont get any arbitrage benefits.

These are base pricemaking mechanisms used for internal lender rate setting in their Treasury. Lenders then apply margins. As rates rise, margins EXPAND. Good explanation is at 2% a 1% margin is 50%. At 5% it would be a huge profit reduction to be still 1%. So bank needs 2.5% margin to break even. So if rates rise 2% then expect this to be 3% to the consumer. eg 5% total. Rate rises are non-linear. A exponential increase in rates occurs v's official rates etc.

Benchmark Rates
https://www.asxonline.com/content/d..._day_bank_accepted_bills_futures_contract.pdf

 

I like this.

 

The issue is what point you arent comfortable paying a high rate which remains variable. Is it 4.5% or 6% ...How about 7.5% ? Interesting opinion by Mac Bank economist who says rates will rise...the likely fall or flatten. Nobody is predicting 1990s repeating...But lets say inflation really takes off. Albo keeps suggesting unions and wage rises for all as a policy. So lets say 10% inflation....Where could rates go ? Its pure guesswork.

Fixed rate can lock in a top side if debt reduction isnt possible. 4.69% for 5 years may be safer than the inability to pay 5% or more. But if that present debt is costing 3.0% then each $100K will cost $2K a year more at 5% and the savings a 4.69% arent much but the risk is further upside eg 7% ? . If you have a $400K debt its very different to six IPs and $2m of debt which may cost 40K a year more. Could you afford $80K a year more ? Not many investors could find $6,666 a month of extra cashflow.

 

We’ve decided to fix a bit with ME, at 4.24% for 3 years - maybe look at other lenders? Getting $3k cashback as well

 

I fixed at 3.44 2yr a few days before rates went up, it was a no brainier as the variable offering was only about 0.40 below.