Smart decisions can only be made by asking ALL the right questions.
The most common question I’m asked by clients who are thinking of fixing is “Will rates go up or down?”
“What are the chances of beating the bank’s variable rate by fixing?”
Although consensus at the moment seems to be that rates will go up, this is crystal ball territory and the banks have much better and more sophisticated crystal ball gazers working for them. Choosing a fixed rate should be more about gaining certainty around your repayments rather than an attempt to win on rate over time. If there is a saving at the outset, it’s a bonus.
What struck me in reflection were other smart questions that should be asked. These often aren’t as obvious, but they can be answered when we look at each client’s specific strategy and circumstances.
This came into focus for me this week after being contacted by a number of clients all considering fixing their rates. One of these clients had been chatting over a BBQ with friends on Friday evening. On Saturday morning, they happened to be walking past a branch and thought that while they were there they’d pop in and ask the question. They were offered a fixed rate almost 0.2% cheaper than their current variable rate to fix the loan. The branch staff cheerfully advised them that this would save them around $800 a year.
Fortunately, they didn’t go ahead as they wanted to run the idea past me first.
So what questions should you ask?
What these clients weren’t aware of before we unpacked their options was that once the loan was fixed, they would lose access to their somewhat substantial redraw. They also weren’t advised that their offset accounts (in which they had around $30 000 saved) would no longer offset the loan. The offset accounts currently save them $1 100 in interest a year.
Had they fixed without asking the right questions, they would have ended up paying more interest, not less!
A better outcome
After our quick discussion around what would suit them best, it was clear that some certainty around repayments was important. After a little negotiating with the bank on our part, we were able to arrange the best of both worlds for them.
We squeezed a little more discount out of the bank for an even better deal on the fixed rate and we split the loan. Now they have a variable loan with their redraw protected and their offset accounts saving them interest, and a fixed rate loan with a great rate and certainty around how much their repayments are. Their existing ongoing annual savings of $1 100 are protected and they’ll be saving an extra $1 000 in interest per year as well, based on current variable rates.
Fixed rates and interest only loans
Another area that can get tricky, particularly for investors, is fixing interest-only loans. This is where different fine print with different lenders creates a bit of a minefield. If the end of the fixed rate and the interest-only period aren’t the same, some lenders will cut short an interest-only period to match the end of the fixed rate. This could result in an unexpected jump in repayments and if this isn’t something you’ve planned into your cashflow, you could get caught short.
As you’ll often hear me say, it’s about both strategy and execution. This is where a knowledge of the fine print can make all the difference.
We’ll always keep an eye on both the bigger picture (and the fine print) but — most importantly — what’s in your best interests. Make us your first call.
Reach me on 0430 383 996 or email@example.com to start a conversation.