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Home > Other Stuff > Free Property Investing Articles > Secrets Of Fixed Interest Rates For Home Loans
Secrets of Fixed Interest Rates for Home Loans
Secrets of Fixed Interest Rates for Home Loans
Monday, June 29 2009
The question for many: Is it time to be considering fixing your home loan interest rate?
Of course, the banks would love you to do just that, because they’ve been pushing the fixed rates up recently, where they’re now totally out of proportion with the current market standard variable rates.
This is all done under the guise, they have to source fixed rate funds on the national and international markets, so this means they have to pay more for them. Which is true - but really - by that much?
Banks love us
Of course, we all know these banks have our best interests at heart and they wouldn’t be tempted to take advantage of our natural uncertainty of where the economy is going to end up and when it’s going to happen. No way, definitely not those guys.
Before making any hard and fast decisions about fixing interest rates though, it’s probably practical to take a look at some of the latest economic news. Now, our agenda here is not to go into detailed depth about it, but more to just skim over some of the cursory information that’s come out in the last few days.
Unemployment rate adjusted
First, the predicted unemployment rate in Australia has been adjusted down from 8.5% to 7.9%. The latest ANZ economic report is saying Australian house prices will defy the economic gloom and edge higher this year. Australian property prices have only softened by 1.2% in the year to the end of May. While the rest of the world has seen 20 percent or more wiped off their average house values.
ANZ said record affordability, a chronic imbalance between supply and demand and ongoing population growth at its highest level in 40 years will support the housing market, although first time buyers currently make up 38% of the market.
However, when that 38% run out of wind, any reduction in market share from that sector could easily be supplanted by investors as investment properties continue to become more attractive with increasing rents from record low rental vacancy rates.
Global bad news
To temper all of that though, the Organisation for Economic Cooperation and Development (OECD) said the jobless rate in the 30 economies they surveyed came to 7.8 percent this last April.
The organisation said last Tuesday, 23rd June that more than 57 million people will likely be out of work in OECD countries by the end of 2010, up from 37.2 million at the end of 2008.
However, keep in mind they also say "Previous downturns have taught us that the jobs recovery will lag a long way behind the pickup in economic recovery."
Banks' monopoly
Since the Reserve Bank of Australia began cutting interest rates last September, mortgage approvals in Australia have soared 20 percent. Additionally, since the sub-prime mess started, more or less than 90% of the mortgage business is now processed through the major banks.
This is because many of the competitive elements that had developed in the market forcing the major banks to cut their margins have disappeared. And lenders like Bankwest, St George, Rams, Resi, Wizard, Aussie etc. have been absorbed by the major players. So, they now have a monopoly and can pretty much do what they damn well please, and that’s exactly what they’re doing.
So, it wouldn’t take too big a cynic to arrive at the conclusion the banks were pushing the fixed rates up just a little more than necessary in order to take advantage of any underlying paranoia in the marketplace.
The solution
Here’s the 'thought of the day' for you. Einstein has been credited with saying, "Man's most ingenious invention is compound interest".
Our recent research shows that amongst the major banks the best 5 year fixed interest rate is now 7.14% (St George), while the best standard variable rate amongst the majors is 5.04% (NAB discounted rate for loans $250k +).
So, why not, if you’ve got the discipline, and that’s going to eliminate some of you right there unfortunately, mentally assume you’ve already fixed your rate 2% higher than your current variable rate (assuming you’ve got one) and start making that increased payment into your home loan.
Yeah, I know, how are you supposed to do that? Well first of all consider that rates will eventually go up anyway, and then you’ll have to. In the meantime, figure it out, get a strategy. Beg, borrow, steal, or get on the internet, Google ‘how to save money’. Employ all of the 'Tips and Tricks' you can get your hands on. "Knuckle down", as Arnie says in the Chrysler commercials. "You can do it!"
Once in a lifetime
You see, this opportunity may never come our way again. The current record low interest rates, are what I’m talking about. And if you can do it, think of the equity you’ll create and what you can do with it as the years roll buy, as opposed to being stressed out all the time because you remain in the banks clutches.
The benefit is, you’ll be paying the extra into your home loan and substantially reducing the balance in your favour instead of paying the extra 2% into the banks coffers.
And we would encourage you to keep doing that throughout the life of your loan, because if you did, the following would be possible. However, firstly keep in mind the following data was calculated on a situation where the interest rates are constant as opposed to the reality where they will vary over the life of a loan. So, it’s just an example, okay!
Substantial savings
If you had a $500,000 home loan and you fixed the interest rate at 7.14% your monthly principal and interest (P&I) repayments would be $3,373.66. The interest payable over the life of a 30 year loan at that interest rate will be $714,513.07. No it’s not a misprint.
If you left your interest rate at the variable rate of 5.14% your P&I repayments would be $2,727.05. The difference between the two repayments is $646.01. So, if you paid that extra amount directly into your home loan each month you would cut the loan term down to 19 years and 8 months from the original 30 years.
But more importantly, you would have saved over $419,000 in interest in the time you’ve saved on the home loan term, which normally would have gone to the bank.
Profit from the facts
You see, all principal and interest home loans are front end loaded. Roughly, on a 30 year home loan it takes a little over past the half way mark of a home loan 30 year term, where at least 50% of the repayment you’re making gets credited towards your principal balance. Prior to that, the greater percentage of the repayment is interest going into the banks pocket. Remember what Einstein said?
Free Mortgage Health Check
If you would like to have your Home Loan Health checked, we’d be happy to do it for you cost and obligation free, just follow this link.
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