Fixing our Home Loan

I am feeling so much better about completing #13 of my 30 before 30 list.

13. Fix our home loan.

Last month, we fixed 2/3 of our loan for 6.64%, and the other 1/3 portion remains variable. I thought this was a good balance where we take advantage of the low fixed rate for 3 years, while being able to pay off tax cheques, bonus' and any savings into the variable portion. I think it protects us relatively well against any rises in interest rates, especially given that we're on a single income.

We've been monitoring the rates, and wanted to wait until the fixed rates had bottomed out a bit before fixing. Sure enough, after fixing, you can see that the fixed rates are starting to climb.

We have been with this particular bank for around 9 years now, through 3 different properties, and different financial situations. We're really happy with it and their facilities. We asked them about any discounts in rates. We were told they would only waive the loan change fee ($250). However, another Building Society offered a lower fixed rate than what we could get with our Bank. We met with the other Building Society. We started gathering the necessary paperwork to change. I had to work out the logistics of changing banks. There were increased fees for accounts, there were loan application fees. It was so marginal that they were just in front to our bank. I felt guilty. I felt like I was betraying someone. I was being unfaithful.

We were so very close to signing, when we went back to our bank, told them we were looking at changing to this particular Building Society, and fixing a portion, and keeping some variable. And they gave us a .25% discount on the fixed portion of the loan! It was still a more expensive rate than the Building Society, but when you take into account the loan change fees, loan establishment fees, loan application fees and savings account fees, it actually worked out more in our favour to stay with our current bank. And wouldn't you know it, the Building Society put up their fixed rate in that period anyway, to be the same as our bank, which means we would have been paying the same rate PLUS all those establishment and change fees. Phew!!

The other great news is that with a tax cheque, my redundancy money, and a very generous bonus from Brendon's work, we were also able to reduce total loan amount by 40%. How great is that? We have reduced our payments by over HALF, with thanks to reducing the amount of the loan and the interest rate. We kept the loan term as it is (27 years), but we're still continuing to pay the same mortgage repayments we were when our interest rates hit 8.96% and paying over double what the minimum requirement is. Not bad for a family on a single income. And it's nice to know after all these years we're starting to be able to have a bit of "just in case" money.

All these different economists have different views on what will happen with the interest rates. When rates were at their highest in August last year, they were still tipping that they would hit 10%. They didn't! They started going down, in fact. So I take whatever they say with a grain of salt. However this article in the Sydney Morning Herald at least gives me a little comfort.

For home loan rates, the only way is up
Danny JohnJune 15, 2009
THE fall in fixed-rate mortgages, particularly longer-term offers, has bottomed out and prices are beginning to rise again in a further sign of the pressure being applied to bank financing costs.

While one- and two-year deals still offer good value in comparison to floating standard variable home loan rates, those of three years and longer are creeping up in price as lenders pass on their own higher cost of borrowing.

Industry commentators believe that fixed rates have now reached their low point after the huge falls in prices seen since October when the Reserve Bank began slashing the official cash rate by four percentage points to offset the impact of the recession on the economy.

That had an across-the-board effect on the fixed-rate market, particularly on short-term offers that have fallen below the popular variable rate. But with the cost of wholesale funding from the international debt markets still at much higher levels than 18 months ago, lenders are finding it difficult to maintain the current low prices despite the inflow of deposits that helps them to fund mortgages.

That was the reason given by the Commonwealth Bank last Friday when it lifted its standard variable rate by 10 basis points to 5.74 per cent in a move that was criticised by the Rudd Government and consumer groups as profiteering and putting at risk the economic recovery.

Most lenders are now charging between 5.7 per cent and 5.9 per cent for a floating interest rate loan, although some building societies have been able to lop as much as 0.5 percentage points off that thanks to their total dependency on deposit funding.

Home owners can still reduce part of the additional cost by locking in their mortgages for between one and two years.

Cheaper short-term money market rates have allowed banks to cut their offerings in recent weeks below the new price of variable priced mortgages. One of the biggest lenders, ANZ, reduced its 12-month and 24-month fixed loans by 10 basis points just a fortnight ago to 5.35 per cent and 5.69 per cent respectively because of the fall in cash rates. But rates for three-year mortgages and beyond rose given the higher cost of borrowing longer term.

The cost of this debt is running at 140 basis points - 1.4 percentage points - higher than short-term credit (primarily the three-month money rate). That compares to just 15 basis points - 0.15 percentage points - just before the advent of the global financial crisis.

Money markets are also factoring in the prospect of higher interest rates in the years to come as the global economy recovers and inflation again becomes a problem for central banks to tackle.

As a result, ANZ lifted its three-year fixed rate by 15 basis points, from 6.19 per cent to 6.34 per cent, its four-year product by 20 basis points to 6.79 per cent and its five-year home loan rate by 35 basis points to 7.19 per cent.

Similar rises have been levelled by National Australia Bank with its three-year fixed rate having jumped by 1 per cent since mid-April. The Commonwealth's longer-term mortgages will also rise today, with its fixed rates rising by 15 to 80 basis points for two-year to 15-year loans.

Warren Shaw, the executive general manager of NAB's retail division, said: "Wholesale fixed rates have increased over the last couple of months as the market has factored in better than previously expected economic signals. However, while fixed rates are no longer at bargain basement levels they are still relatively low by historic standards."