This morning as I was sitting down to write on the (immediate and medium) future of interest rates, knowing that they are poised to head down again – two clients of long standing emailed me.
One wrote to me – tongue in cheek;
“I know (how much) you “adore” fixed interest rates, not, but now, locking part or all of a home loan in at these ever so low interest rates needs to be considered?
I still remember the painful 14% home loan interest rates.
Looking forward to your opinion in regard to this matter.”
Surely with rates now under 3%, surely with banks offering fixed rates in the mid 2%’s – SURELY it must now be time to fix … Surely!!
The best time to fix is still never.
What exactly is going on at the moment?
I always take notice of the person with the RED interest rate button on their desk – that opinion is the only one that counts…
At the start of the Covid-19 episode in Australia the Reserve Bank governor stated that the Reserve Bank was going to pour “whatever it takes” by way of cash into the Australian Bond market so that the 3-year government bond rate would be at 0.25%. As he said, this then become the “risk free rate of borrowing for a bank” in order to on lend to consumers.
This morning the Australian 3 Year Bond Rate sits at 0.27% – close enough.
What does this mean for a bank?
Banks are happy to make a margin of 1.8% on the money they lend.
Banks love to make a 2.1% margin on the money they lend if they can.
So, if the Bond Rate is at 0.25% then the cost of money to the consumer should be between 2.05% and 2.35%.
The consumer rate on home loans at the moment is under 3% but much higher than 2.35%.
I have been ok with this while banks are dealing with making provisions for Covid losses. They are deferring payments on roughly 8% of the Australian mortgage market. There are no deferrals for banks – they are paying interest on their borrowings and not able to pass all of that on for now. The chickens will come home to roost for the borrowers who have deferred though – there is no forgiveness here – just deferrals.
There are 3-year fixed rates around in the 2.6’s (and I am ignoring the Covid fixed rate specials that revert to awful rates at the end – just check their comparison rates).
Let’s say I was in charge of setting futures contracts in a bank – I would say to my superiors – “hey, let’s offer 3 years fixed rates to our idiots – oops sorry – I meant loyal customers – of 2.7%”.
That is a “risk free” profit margin of 2.45% – risk free because the bank has locked in its costs for 3 years (at 0.25) and locked in its profit for 3 years at 2.45%.
It is no wonder that in a recent enquiry into price setting of banks by ASIC, that ASIC found that:
- It is legal for banks to charge whatever they wish.
- Consumers are fools if they don’t shop.
These current ‘cheap’ fixed rates take customers for fools.
Banks will NEVER give you anything that isn’t in their favour.
They have friendly, cuddly TV ads while procuring as much of your money as they corporately can get away with.
Since the start of this year when ASIC gave a legal underpinning to bank behavior (reinforcing the age-old principle of Caveat Emptor – Buyer Beware) I have been running my own campaign with our lender panel.
Namely – under Best Interest Duty legislation – it is my legal obligation to do what I have done since day 1 in my 23-year mortgage broking career, which is without fear or favor, to protect your interests.
I have let my lender panel know that if they want to attract my new clients that they must agree to reprice my existing client’s loans down the track, in keeping with the offers being given to new ones at that (future) time.
At this stage only 3 banks have come on board, and that has left some very substantial banks out in the “Alan Heath cold”.
I review, every loan, every client, every 6 months and adjust your rate back to market whenever possible.
Hard though it may be for you to believe – the immediate future of interest rates is down.
So as always, now is a good time to stay variable and reap the benefits.
Talk to me at any time about your loan – just Ask Alan, and in the meantime know that for
Every 6 months
I will be specifically reviewing the rate on your loan.
While you lead your busy lives – Alan is looking after your loan.
On house price? While rates stay this low – house price will remain stable.
It will continue to go up in desirable suburbs.
It will fall in suburbs where (unfortunately) unemployment might remain high.
The law of supply and demand will apply – with different outcomes in suburbs where supply and demand work in different directions.
One general principle – different local outcomes.
In times like this – this is why you have me… Just Ask Alan.