True Financial

  • Home
  • My Prosperity Login
  • About
    • John Duncan – Fee Only financial planner
    • Fee for Service Financial Planning
    • Our Ideal Client
  • Advice
    • Benefits of Financial Planning
    • Cash Flow Management
    • Superannuation
      • What is Superannuation
      • What is a SMSF
      • Contributions Limits
    • Investments
      • Investment Philosophy
    • Insurance Advice
      • Insure The Stay-at-Home Parent
      • Income Protection Insurance
    • Retirement Planning
    • Estate Planning Advice
    • Business Advice
  • Articles
  • Video Library
  • Testimonials
You are here: Home / Budget / The Silver Lining

December 19, 2011 by John Duncan

The Silver Lining

Uncertainty in Europe, a volatile share market and falling property prices; there has to be some good news! Today I feel a little like Santa Clause for those with large debts as there is a silver lining. With inflation on the way down and predictions of a slowing economy we have now seen interest rates fall two months in a row. Interest rates have now fallen half of a percent, equating to $1500 saving a year or $125 a month, for those with a $300,000 mortgage. With a couple more interest rate falls predicted by a number of economists, do we just ride the gravy train all the way down and hope they stay down long enough to get some real benefit? Or do we take advantage of some very competitive fixed rates and lock them in for a period of time?
We only need to look at history to know that current interest rates are fairly low. As you can see below the Interbank Cash Rate (the interest rate that the reserve bank sets and the banks lend to each other at) has not been below 5% many times in the last 35 years.

The interbank cash rate has only been lower than the current 4.25% once. This was during the first stage of the financial crises when the cash rate bottomed at 3% on the 8th April 2009.

The cash rate fell from 7.25% on the 2nd Sept 2008 to 3% by the 8th April 2009. I guess the question many people will be asking is, how much further have they got to fall now?
Unfortunately no one can predict interest rates with any certainty. Back in February this year most economists were expecting rates to continue going up. The yields being paid for government bonds, (being the best predictor of interest rates) showed a nice, healthy upward sloping yield curve as seen below.

How quickly the story changed however. In June the curve was relatively flat and by November the yield paid on the 3 year bonds was a full 1% below the cash rate, as conditions in Europe worsened. It was therefore cheaper for the Government to borrow over 3 years than it was to borrow for 1 year or 1 day. If banks were able to borrow similarly to the government and charged the same margin on their long term loans as their short term loans, we would be seeing 3 year rates on offer of around 5.25%.

Many of you will be thinking, how does this affect me?  Some banks are currently offering fixed rates as low as 5.75% fixed for 3 years. Many borrowers on a variable rate loan will be paying somewhere in the vicinity of 6.5%. If economic conditions continue to worsen interest rates set by the Reserve Bank will continue to fall. But how much of this fall will be passed onto you through your own lender is difficult to know. Westpac and ANZ have both come out and indicated that their decision, to continue to lower rates, will be a business decision and will not be based on the actions of the Reserve Bank. Unfortunately the yield curve above has little relevance to our banks as most of their funding is completed through offshore borrowing.  ANZ and Westpac have both advised that offshore funding costs are increasing. Smaller banks such as Bank of Queensland, who have recently had their credit rating downgraded, will find raising funds overseas even tougher.
So to sum up, interest rates cannot be predicted with any real certainty and the only thing we know for sure is that the current 3 year fixed rates on offer from as low as 5.75% are very competitive in historical terms.
Fixing your interest rate will provide certainty of your payments over the fixed rate period but you need to take into account the loss of flexibility on fixed rate loans. The variable rate may also fall below that of the current fixed rate and fixed rates offered in the future may also fall below those rates currently offered. Is it likely that variable rates will average lower than the current fixed rates on offer? Only history will tell.

By fixing your entire loan you may also be limited in making extra repayments and you may lose the option of redraw. If you decide to break your fixed rate you may also be up for considerable break costs, depending on the movement of interest rates. Fixing only part of your loan and leaving a portion variable may give you back a lot of the flexibility you require.
If you decide to lock in a low rate now however, there are a few things to take into consideration before calling your current lender and locking in their fixed rate. Fixed rates are very competitive but there is a great deal of difference between the rates offered between the lenders. Fixed rates do not necessarily go up and down with variable rates and they are heavily influenced by the deal the bank receives when raising funds. The sharpest current rate on offer (16/12/11) comes in at 5.75% and the worst at 6.69%. That’s over half a percent difference and amounts to $6750 difference in repayments over 3 years on a mortgage of $300,000. So, if you decide to lock in a fixed rate, it is a good idea to give us a call so we can shop around for you and find the best deal. You also might want to consider locking in your fixed rate to guarantee you receive the rate that you have applied for.  If the lenders fixed rates go up between application and settlement you may receive the higher rate and not the great deal that you applied for. To lock in the fixed rate you want, you may have to pay a guarantee fee.

This article was supplied by:
Mango Financial Services Pty Ltd
Australian Credit Licence. Licence No: 387643

Filed Under: Budget, General, Investment, Property Tagged With: Loans

Keep up to Date

Powered by VMA-Emailer

Meet John Duncan

John Duncan - Financial Planner

Director for True Financial - John Duncan - Fee Only financial planner To receive the best financial planning advice you need the best financial planner. John Duncan is certainly in that category. John is a financial planner who is unique in not only his high level of knowledge and experience in financial planning but also in the amount of areas that John advises in. A Financial Planner with a strong Education background John is a Certified … Read More

Post Categories

  • Budget (5)
  • General (27)
  • Insurance (2)
  • Investment (14)
  • Property (5)
  • Superannuation (4)
  • Tax Tips (7)
  • Uncategorized (49)

Like us on Facebook

Recent Posts

  • Don’t Vote with your Portfolio
  • Investing Has Been Solved
  • John Hussman: Man Who Predicted…
  • Bank Runs
  • What Port in a Storm?

Privacy Statement

See our Privacy Statement here

Keep up to Date

Powered by VMA-Emailer

True Financial is an Authorised Representative No. 428771 and Credit Representative No. 428873 of FYG Planners Pty Ltd, AFSL/ACL No. 224543. ABN 29 009 541 253

Contact Information: Address: 23 Errard St Kelvin Grove 4059 - Phone: (07) 3169 2570 - Email: admin@truefinancial.com.au - Web Design & SEO by: Visual Marketing

Information provided on this website is general in nature and does not constitute financial advice. True Financial Pty Ltd will endeavour to update the website as needed. However, information can change without notice and True Financial Pty Ltd does not guarantee the accuracy of information on the website, including information provided by third parties, at any particular time. Every effort has been made to ensure that the information provided is accurate. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult a financial planner to take into account your particular investment objectives, financial situation and individual needs.True Financial Pty Ltd does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this website. Except insofar as any liability under statute cannot be excluded, True Financial Pty Ltd, its employees do not accept any liability for any error or omission on this web site or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by True Financial Pty Ltd. You may not alter or modify this information in any way, including the removal of this copyright notice.
Manage Cookie Consent
To provide the best experiences, we use technologies like cookies to store and/or access device information. Consenting to these technologies will allow us to process data such as browsing behavior or unique IDs on this site. Not consenting or withdrawing consent, may adversely affect certain features and functions.
Functional Always active
The technical storage or access is strictly necessary for the legitimate purpose of enabling the use of a specific service explicitly requested by the subscriber or user, or for the sole purpose of carrying out the transmission of a communication over an electronic communications network.
Preferences
The technical storage or access is necessary for the legitimate purpose of storing preferences that are not requested by the subscriber or user.
Statistics
The technical storage or access that is used exclusively for statistical purposes. The technical storage or access that is used exclusively for anonymous statistical purposes. Without a subpoena, voluntary compliance on the part of your Internet Service Provider, or additional records from a third party, information stored or retrieved for this purpose alone cannot usually be used to identify you.
Marketing
The technical storage or access is required to create user profiles to send advertising, or to track the user on a website or across several websites for similar marketing purposes.
Manage options Manage services Manage {vendor_count} vendors Read more about these purposes
View preferences
{title} {title} {title}