A punt on Cup Day

I’ve taken a punt on Cup Day, even though I’ll be flying back from Adelaide about the time the race is on.

The hot tip is that the Reserve Bank will decide to up interest rates on that day. In fact, the doom-and-gloom merchants at ANZ are predicting up to three rises in the next year, and some of the banks are considering raising their rates on top of that. So I’ve done what I probably should have done before the last couple of rises: rung up the bank and arranged to switch to a fixed rate.

I’m currently on 7.62%. They said they could give me 7.80% for 1-3 years, or 7.85% for 4-5 years, for a $350 switching fee. I’m actually thinking I’ll plump for the latter. It’ll leave me paying about $60 a month more (very manageable) but mean some certainty for a while, allowing me to be free from obsessing over interest rates.

Okay, so theoretically the rate could go lower, but somehow I doubt that’ll happen anytime soon. So hopefully it’s a safe bet.

By Daniel Bowen

Transport blogger / campaigner and spokesperson for the Public Transport Users Association / professional geek.
Bunurong land, Melbourne, Australia.
Opinions on this blog are all mine.

11 replies on “A punt on Cup Day”

I have no financial expertise so be warned and apply grain of salt etc.

However I sought advice a few years ago about fixing the home loan and I was told not to go for five years because interest rates tend to go through a five year cycle.

As such if you fix for five years while they are rising or peaking, in five years time you will have missed the trough and come out at or near another peak.

My 3-year fixed rate just expired a couple of weeks ago. I chose to re-fix at 7.80% for another 3 years (my mortgage is with St.George). Cost $290 for them to push a couple of buttons on their computer to make it happen.

Long term analysis of fixed vs variable interest rates shows that the banks (very almost) always win if you take fixed.

That said, a fixed rate does provide some certainty, and each time I’ve bet fixed in the past I’ve won. But, like I said, you won’t win.

While banks can be wrong and the point takes no account of personal matters, the bank must make money and they are hoping they will win on fixed rates. Bit hazy now, but we did fixed rates for one year when we moved here. The bank won. At the end of the period, variable was cheaper.

it’s criminal that the bank slugs you $350 for switching. The actual cost for them would be negligible.
PS Another reason to hate banks!

I work for a mortgage originator and even I don’t know whether or not it is right to fix. I took a punt however and locked in for 3 years a few months back. Hasn’t come back to bite me yet but if the rates drop then hey ho, you just have to grin and bear it. I can remember when rates were as high as 16% (and above that for securitised loans) a few years back so I don’t think 7.8% is too high. Whatever you do there is absolutely no way the banks are going to lose money on you. End of the day they are there to make a profit at our expense.

Here in the states, I took a fixed at 5.85 for 30 years when I bought in 2003. The trick with adjustable rate mortgages is that they’re positioned to look really attractive for the first few years while the bank or broker selling them tells you how you’ll be making lots more money or can switch to a fixed rate before you end the lock in on your teaser rate.

Only problem is that a lot of the financial crisis in the U.S. is because people fell for that. They all bought houses that were at the limit of what they could afford at the teaser rates, their income didn’t go up as they expected, then their teaser period ended and their payments skyrocketed.

Now all these people are losing their homes and the companies that funded their mortgages are going bankrupt because they can’t sell the houses for near what they’re owed. The housing marketing was already slowing due to rising interest rates, now it’s getting worse because all the banks are scared to fund mortgages while there’s a glut of foreclosures on the market, driving prices down.

I’ve got two neighbors who have been trying to sell their houses, and they’re having no luck. One took a job in another state and moved, so he’s getting desperate, and every time he lowers the price on his home, it forces the other neighbors to lower their price.

And most of this is due to the overselling of adjustable rate mortgages to people who didn’t understand what they were getting into.

I don’t think we can lock in a rate for more than 5 years. And I don’t have enough of an understanding to guess exactly how it’s going to go (USD or not)… but today the rate did, as expected, jump 0.25%.

Stick with your racing analogy – the Banks are the Bookies, and you’re the mug punter. _Of course_ the banks won’t lose on the fixed rate, on average.

Unless, of course, we are going to have a repeat of the McEwan financial cockup that Whitlam walked into. There he kept his campaign promises rather than putting on the brakes upon discovering the “black hole”.
Are there any students of finance out there that can compare and contrast then and now?

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