I'm in the process of buying a house and have a home loan approved at prime. I'm a bit worried about the junk status of our currency and not sure if I should go fixed or variable. If I go fixed it goes up by 2 percent. Any advice will be welcomed.
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Home loan fixed or variable
- Thread starter Mark.K
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I.am.Sam
Honorary Master
i would go variable and maybe add the extra money into it
that way if it does go up you wont really feel it
that way if it does go up you wont really feel it
ToxicBunny
Oi! Leave me out of this...
Only by 2%?
Must say that is interesting, since that says the banks think that over the term of your loan the variance in the prime lending rate will only equate to +2% (up and down swings).
Kosmik
Honorary Master
Variable is the sensible way to go for now. In theory our interest rates are already cushioned for a low economy so it would be quite drastic to go up 2% in the short term and you can fix at anytime.
Kosmik
Honorary Master
Not quite, maximum fixed term I think is 5 years or less.
ToxicBunny
Oi! Leave me out of this...
Ahhh yes... but even over 5 years its still pretty interesting.
I.am.Sam
Honorary Master
Kosmik
Honorary Master
not really, you will have to incur the cost while the spot rate is below the 2% spread, and then when the interest rate does rise by 2% you only enjoy the benefit for a brief period.
Economists struggle to forecast 6 months into the future, in order to know with certainty this product will benefit you, you need to forecast interest rates for the next 5 years, all the best trying that.
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ToxicBunny
Oi! Leave me out of this...
My comment is that the banks and there models and economists and and and are thinking that in the next 5 years the rate may rise around 2% , or just above that. They never put a fixed rate in front of a client at a figure where they think they won't make as much money as a variable rate.
I am making no comment on how its beneficial or not to the person taking the fixed rate.
the 2% spread and 5 year term has been something around for a while now, even 6 years back I was offered the same deal when interest rates were still declining to a certain extent, it seems to me more like a generic product costed on historic averages rather than the use of models in forecasting the future.
just as a side note, I made a topic about GT247 now offering contracts which don't expire, the same sort of principle applies here.
If the bank offered a fixed rate over the entire term of the bond, then it would make more sense to do so (especially when rates are at multi year lows) but over 5 years the odds lean heavily in favour of the bank to come out tops.
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Think of it like this:
If you fix, and pay 2% more, then interest rates must go up by at least 3 to 4% in the next 2.5 years before you score (to recover the extra 2% you would have paid, versus the 2% you have already paid up till that point). The word on the street is that interest rates will likely go up 1% to 3% max in the medium term. Markets already expected downgrades and we are already paying more interest because of that. It really depends how much the Zupta's steal and borrow in the next 2 years. Beyond that, we will have a new president and we will have changing political power.
Besides, if you can afford the 2% extra now, then rather put that money into the bond as an extra payment, and worst comes to worst, you can even use that extra capital to pay your installment. Or even commit the extra capital and recalculate your monthly installment to a lower amount.
If you fix, and pay 2% more, then interest rates must go up by at least 3 to 4% in the next 2.5 years before you score (to recover the extra 2% you would have paid, versus the 2% you have already paid up till that point). The word on the street is that interest rates will likely go up 1% to 3% max in the medium term. Markets already expected downgrades and we are already paying more interest because of that. It really depends how much the Zupta's steal and borrow in the next 2 years. Beyond that, we will have a new president and we will have changing political power.
Besides, if you can afford the 2% extra now, then rather put that money into the bond as an extra payment, and worst comes to worst, you can even use that extra capital to pay your installment. Or even commit the extra capital and recalculate your monthly installment to a lower amount.
yup, if you want to get technical you can even include the time value of money as well
basically you take the costs now, and the benefits you only reap once the spot rate rises above your fixed rate. Effectively those benefits would be discounted significantly more compared to the costs if you calculated the present value of the entire thing.
SauRoNZA
Honorary Master
SauRoNZA
Honorary Master
Yes, very much so.