Presentation on theme: "Fix or Float? 1. Variable Rate Fix rates are below variable rates? 2 Fixed rates are almost 0.5% below variable rates. This is not a common occurrence."— Presentation transcript:
Fix or Float? 1
Variable Rate Fix rates are below variable rates? 2 Fixed rates are almost 0.5% below variable rates. This is not a common occurrence normally fixed rates are above variable rates. Most economists are expecting that by the end of 2013 and possibly into 2014, there's actually going to be a number of rate cuts. Fixed Rate
Why do rate cuts happen? When the economy actually needs an injection of cash and isn't going that well, that's when the Reserve Bank actually cuts rates. 3
Why do rate cuts happen? To stimulate an economy that is not performing. it's really not a very good sign for our economy. However, for our pockets, it is a good sign and it means that we've got a bit more money to put back into the economy. 4
Australia’s economy RBA cash rate is 3.25% 5 US and UK cast rates are 1% or less
Australia’s economy 6 The things in 2013 that will affect the economy will be: The election and the associated confidence associated with that. Employment. Consumer confidence, seriously we have saved more then we have ever before, we have paid off credit card debt more than ever.
2013 Economy 7 This is really a whole other discussion but essentially if we look at total yields for property: being on overage 15% historically this could be 10%pa capital growth 5%pa rental yield.
2013 Economy % of our market which are first home buyers - people start bidding for the property they want to rent – and rents will go up So don’t be surprised if we start seeing that total yield returning to the long term 15% average but the majority of the income coming from the rental yield. As you will see below as more and more people start worrying about their jobs we will see them thinking renting not buying is a safer bet.
2013 Economy 9 The Australian dollar is high at over $1 to the US. This means that selling stuff overseas is difficult for our manufacturers as those OS people buying our stuff find our products expensive. So our Australian manufacturing industry is having a hard time they are not upgrading equipment and they are not employing as they are not selling.
2013 Economy 10 big employer affected by the Australian dollar tourism is down
2013 Economy So is the mining industry safe? 11
However how does this affect us and our interest rates? Currently Australia is going through the largest construction phase and investment phase in history Construction phase is coming to the end and by the end of 2013 we will still have some projects in construction but we will be mainly producing 12
What does unemployment have to do with this? Unemployment is a concern and one of the factors that will have the RBA consider seriously further dropping interest rates. 13 VARIAB LE RATE FIXED RATE INTER EST RATE
Where is the Aussie dollar going? 2013 RBA 14 $1.03US +-10% ie 90-$1.10 undervalued by 20% Ie $1.20ish +-5% National Australia Bank MODELS Suggested by chief Economist Alan Oster & NAB
Where is the Aussie dollar going? In fact between Nov 2011 and March 2013 there were 6 interest rate cuts. So what does this mean – I long time ahead of a strong, high Australian dollar and pain for those industries who depend on selling overseas and that could be more people losing their jobs and hence more negative sentiment and a longer time for the economy to respond despite the fact that we are actually in a pretty good position personally 15 Nov Mar. 2013
What is a good fix rate? In exchange for an annual fee and if your loan is over $150,000 it is not unusual for most people to be paying 0.7% less than the standard variable rate = 5% /20 years VARIAB LE RATE FIXED RATE INTER EST RATE
VARIAB LE RATE FIXED RATE INTER EST RATE Back In History looked at the average variable and fixed. It would seem better off choosing to stay variable 70% of the time that is you had 3 in 10 chances of saving money if you fixed for 3years YEARS
VARIABL E RATE 10% Back In History This has happened at one time in the last 20 years. At one point 3yr fixed rates were 16.5% within 2 years the variable rate dropped to 10%. This could of cost someone an additional $30,000 over that 3 year period. Over the same 20 years if you did not fix for 3 years and rates increased the most you could miss out on was about $9000 over that 3 years in savings. 18 FIXED RATE 16.5 % INTER EST RATE 20 YEARS
How do you know if fixing suits you or not? Think about it this way, the big banks have a team of the smartest economists sitting there day in, day out looking at the economy and doing analysis on how they're going to make money for the bank. So does it surprise you honestly that you have a 3 in 10 chance of beating the banks and fixing and coming off the winner? 19
What does that this mean to you? $230, VARIA BLE RATE FIXE D RATE INT ERE ST RAT E $50,000 $115,000 or 50%
2 years $20,000 What does that this mean to you? 21 VARIA BLE $60,00 0 loan FIXED SAVIN GS $20,00 0
What does that this mean to you? 22 2 years $20,000 VARIA BLE $70,00 0 FIXED SAVIN GS $20,00 0 $40,000 OFF SET ACC T. $10,0 00
What is the downside of fixing? There are some really tempting fixed rates set up there at the moment, especially when a lot of them look like they're 0. 5% lower than your variable loan. 23 VARIABL E RATE 10% FIXED RATE 0.5 % INTER EST RATE
Behind the scenes 24 5% FIXE D 5. 5% three fixed loans together, they sell them to investors and promise the investors 5. 5% in the future. Now, if interest rates drop down, the investors are really quite happy that they're getting 5. 5% and you're not really happy that you're paying 5. 5%, so you might think about actually breaking your fixed rate loan.
You need to plan ahead If you're fixing for two years, think about what you need for the next two years. So, if you are planning on selling your house in the next two years, a fixed rate loan may not be in your best interest. 25
Interest in Advance 26 There is also the possibility of paying all your interest in advance for the year ahead. Which many consider doing just before the end of the financial year for the associated tax advantages? So you do need to have all the funds available to pay for the entire interest upfront. However the benefit is that you get an even cheaper interest rate.
What will happen in the future? Now, a lot of economists disagree and none of us have a crystal ball and we don't know what's happening with the employment rates and the economy, the effect ongoing issues overseas. 27
What will happen in the future? Many believe that there is the possibility of another %pa of interest rate drops as of now March 2013 and the end of the year. The reality is that many of these will probably be at the end of the year when we see the construction stage of the mining industry finish. However with the lower cost of funds for lenders now expect that they will actually pass on more than amount that the RBA cuts rates by. Which if you think it is really fair as they failed to pass on in their entirety the majority of the rate cuts over the last few years March %
When will fix rates start rising? Well in fact one lender in mid-March 2013 started rising its 2 year 4.99%pa rate to a 5.29&pa rate. So as we have some of the major lenders suggesting that variable rates will drop by 0.5%pa and stay about that rate for the next 2 years then possibly fix rates for 3 and 5 year rates might start creeping up at some time in the 5 months. There is even 4.79%pa 2 year fixed rates available, if you agree to have no more than 50% fixed ie if you plan to split your loans % pa rate to a 5.29% pa rate variable rates will drop by 0.5%pa 2013 March
Fix or Float 30 5 years 1 ST YEAR 1 ST YEAR 2 ND YEAR 3 RD YEAR 3 RD YEAR 4 TH YEAR 20 years 1 ST YEAR 1 ST YEAR 2 ND YEAR 3 RD YEAR 3 RD YEAR 4 TH YEAR 7.5%PA
Fix or Float These are things you need to consider: 1.What are you plans for your property in the next 2, 3, or 5 years ie the length of time you are thinking of fixing. If you plan to sell or there is a possibility of this then fixing could cost you a bundle when you sell and you have to break your fixed rate contract 2.Do you have a large amount of cash or plan to get a large amount of cash that could be used to your advantage that is not possible with fixed loans? I have a caveat on that there is one lender that allows you to have a fixed rate loan and an offset – and I have used this lender personally together with a split loan so I can move my cash from the variable to the fixed loan depending on which is higher. This is a more advance strategy but you should be aware that it is a possibility – especially for those undecided 3.Do you care that variable rates might drop below your fixed rate for maybe 1 year of the 3 year fixed loan period if it means you can sleep easier at night as you have the comfort of knowing what you are exactly going to have to pay? 31
What if you decide to fix – but with a new lender? Fixed rate loan is definitely something you can consider, and at the moment a lot of the lenders are actually offering some really good deals to get your business, so they're even paying 32 $700 CURRENT LENDER $2000 Bank A to Bank B $750+$250 Bank B charges
In Summary So, now at the moment, everyone is kind of looking at the interest rates and looking at lenders and thinking that they would like to take the opportunity, fixed rate loans with some really great opportunities out there and if you're not planning on selling your house or refinancing to another bank in the next three to five years, then it's definitely something you may want to consider, but remember you may not want to fix all of your loan, you might want to keep some of it variable and that variable amount that you keep might be actually associated with what your bonus or savings can accumulate to within that period of time, 'cause often the offset account is one of the most powerful things of an Action Loan. 33
**Professional Packages In the last 10 years, professional packages are not just for professionals, you don't have to be a doctor or a lawyer or an accountant to be a professional, and all you need to do is actually have a loan over $150, 000 in most banks to get a better discount. Now, those professional packages often come with an annual package fee, but you do get some benefits, usually you get your credit card pay waived, you get your savings account fees waived, you get monthly account fees waived, you get application fees waived, evaluation fees waived, but you do on average pay about $350-$395 a year. So, you need to make it worth, worth your while to pay that, and usually over about $250, 000, you'll find that that's really worthwhile. You do get a lot of benefits; you can split your loans, sometimes up to 10 splits. Which is handy as you can split the purposes of your loan, ie some for investment and some for personal debt (ie your home loan, car, holiday, credit card etc). This is handy at tax time. 34
Jane Slack Smith Director of award winning Investors Choice Mortgages and Founder of Your Property Success online education teaching home owners and investors to find the right property at the right price. Jane’s is the author of Your Property Success with Renovation: 2 properties, 1 renovation $1million in the bank. For more information or 35 Jane Slack Smith