Interest Rate Rise Effect on both Fixed & Variable Loan

[EstatePreneur]

As everyone must have found out the IR has just gone up today.

My loan is with Westpac, and it's on a 3 years fixed rate at 7.69% when I first applied for the loan weeks ago, with settlement date still 1,5 months away (28 September to be precise).

I just rang my bank (Westpac), and the lady said that the same rate still applies to my fixed rate loan at 7.69%.

I was wondering if the rise of IR today will affect that 7.69% rate at all until my settlement date? And if so, how soon does it usually take effect (i.e. until Westpac announces their new rate)?

The lady from Westpac said that usually the IR rise doesn't immediately affect the bank's loan rates right away, especially on those fixed rate loan packages.
If this is true, then do I still have the chance and enough time to lock-in the rate that I was originally given which is 7.69%??

Or is it too late now to lock-in the rate? The Westpac lady said the rate lock-in process won't take that long.

 

[Spectre]

EP

If you didnt rate lock your loan at the time of application then it will settle on whatever rate the fixed is at the end of Sept.

Suggest you contact the lender / broker you did it thru and request to lock it in if that is what you want to do.
Westpac do charge a fee to do so, I believe it is 0.15% of your loan amount.

Regards
Richard

 

[EstatePreneur]

Hi Richard,

Thanks for your reply. Westpac does charge a lock-in fee $330. And yes, the actual fixed-rate will apply on the settlement date, the day when the loan is drawn.

But, what really concerns me is whether it's too late now to lock-in the rate or I can still manage to get the 7.69% rate locked-in, after the IR rise today.

 

[alexlee]

Hi Richard,

Thanks for your reply. Westpac does charge a lock-in fee $330. And yes, the actual fixed-rate will apply on the settlement date, the day when the loan is drawn.

But, what really concerns me is whether it's too late now to lock-in the rate or I can still manage to get the 7.69% rate locked-in, after the IR rise today.

The fixed rates don't necessarily move with the variable rates. In any case, what's to worry about? Give Westpac a call ASAP. If they can give you the same rate great, if not, there's nothing you can do about it (except bargain with them).
Alex

 

[EstatePreneur]

The fixed rates don't necessarily move with the variable rates. In any case, what's to worry about? Give Westpac a call ASAP. If they can give you the same rate great, if not, there's nothing you can do about it (except bargain with them).
Alex

That's what I love to hear. Thanks Alex.

In fact I just rang Westpac, they said I'm still able to lock-in that 7.69% rate, and it will become effective immediately (rate locked-in) if I agree to pay the $330 lock-in fee (I have $220k loan with them).

If Westpac decides to raise their fixed rate, then on paper, this will save me roughly $50 per month on repayment for the next 3 years, which sums up to $1800. So I save roughly $1500 ($1800 - $330 the lock-in fee).

Now, is it possible that Westpac wouldn't raise their fixed rate in the next few weeks (say until 28 September)?
What would be the usual banks action/scenario when an interest rate rise takes place just like what happened today?

Or should I just shut my mouth and go lock in the 7.69% deal?

 

[alexlee]

Now, is it possible that Westpac wouldn't raise their fixed rate in the next few weeks (say until 28 September)?
What would be the usual banks action/scenario when an interest rate rise takes place just like what happened today?

Or should I just shut my mouth and go lock in the 7.69% deal?

Yes, there is a possibility, because technically fixed rates are less dependent on variable rates. For example, in the last year or two we saw fixed rates go DOWN when variable rates went up. i.e. just because the variable rate rises doesn't mean fixed rates have to follow.

However, with credit potentially tightening world wide, fixed rates are more likely to head up than down.

But what would be your motive in not locking in the rate? Just to save the fee?
Alex

 

[EstatePreneur]

Yes, there is a possibility, because technically fixed rates are less dependent on variable rates. For example, in the last year or two we saw fixed rates go DOWN when variable rates went up. i.e. just because the variable rate rises doesn't mean fixed rates have to follow.

However, with credit potentially tightening world wide, fixed rates are more likely to head up than down.

But what would be your motive in not locking in the rate? Just to save the fee?
Alex

Rightio, that's what I heard from the Westpac customer rep as well, that the fixed rate wouldn't necessarily go up. This scenario sort of convinced me that I wouldn't need to lock in the rate, and yeah, I could save a bit on the lock-in fee too.

However, as you mentioned considering the global economy world wide, it's more likely to go up. I guess you'll be saying, LOCK IT IN! ??

 

[alexlee]

I don't know what I would do. Personally, I wouldn't worry too much. But ask yourself this: how bad would you feel if fixed rates went up in the next 6 weeks, and is that bad feeling worth the rate-lock fee?
Alex

 

[EstatePreneur]

I don't know what I would do. Personally, I wouldn't worry too much. But ask yourself this: how bad would you feel if fixed rates went up in the next 6 weeks, and is that bad feeling worth the rate-lock fee?
Alex

I remember that Westpac just raised their fixed rate by 0.10% about 1,5 months ago. I was supposed to get the 7.59% deal instead of the 7.69% one. So since they've just raised their fixed rate, I think they wouldn't do another increase anytime soon.

I wouldn't feel that bad if it went up by 0.25 (I'd feel bad if it's more than 0.25). The RBA upped the IR by 0.25, so I suppose it's pretty impossible for the major banks like Westpac to raise their fixed rate by more than 0.25?
I mean they also have to maintain their rate competitiveness with other major banks too.

Having said that, I'm really excited to learn from this, if the fixed rate went up, I'd have a 'bit expensive' lesson to learn, and this lesson should be useful I were to face similar situation in the future.

I will keep you posted.

 

[alexlee]

I wouldn't feel that bad if it went up by 0.25 (I'd feel bad if it's more than 0.25). The RBA upped the IR by 0.25, so I suppose it's pretty impossible for the major banks like Westpac to raise their fixed rate by more than 0.25?
I mean they also have to maintain their rate competitiveness with other major banks too.

You might want to study more about fixed rates, then, because fixed rates CAN spike quickly. Think about it: fixed rates have gone up lately, while variable rates have been flat. Like I said, the fixed rate doesn't necessarily have ANY relationship to the variable rate. If world-wide liquidity for mortgage bonds dry up over night, the fixed rate can shoot up. At that point ALL the banks will have to raise their fixed rates.

Basically, variable rates are set by the RBA (less the usual discount, which is bank-driven) and fixed rates are set by the world market for mortgage bonds. The RBA doesn't have too much influence on the latter.
Alex

 

[Simon]

Do you know your short to medium plans? Fixing means a loss of flexibility often with break costs if selling or refinancing.

 

[Spectre]

EP
Simon I think hes purchasing so probably sitting pat for a bit, loan hasnt settled if I'm reading it right... not sure as the line under says still renting.

IF you are simply wondering if Westpac will be increasing their fixed over the next week or so I cant say as I dont work for them (well I do but I dont but I do but I dont... what do you say as a broker...)

However I did get an email from ANZ saying their 2-5 year fixeds are going up to 7.89% on monday... so what do YOU think other lenders are going to do.

If you still move quickly you can still get under 7.60% on 2-3 yr fixeds but I'd be figuring these are gunna be jumping soon enough as well.

 

[EstatePreneur]

Do you know your short to medium plans? Fixing means a loss of flexibility often with break costs if selling or refinancing.

Hi Simon, my plan is to go fixed for 3 years, and then switch to variable and then pay it off as quickly as possible after the fixed period finishes.

But in during those 3 years, I'm thinking to purchase my 1st IP as soon as the bank allows me to borrow again, but of course it will depend on my serviceability as well.
The reason I go for 3 years fixed loan is I tend to see the IR is gonna be going up than down, and also makes it easier for me to do my budgeting.

 

[EstatePreneur]

EP
Simon I think hes purchasing so probably sitting pat for a bit, loan hasnt settled if I'm reading it right... not sure as the line under says still renting.

IF you are simply wondering if Westpac will be increasing their fixed over the next week or so I cant say as I dont work for them (well I do but I dont but I do but I dont... what do you say as a broker...)

However I did get an email from ANZ saying their 2-5 year fixeds are going up to 7.89% on monday... so what do YOU think other lenders are going to do.

If you still move quickly you can still get under 7.60% on 2-3 yr fixeds but I'd be figuring these are gunna be jumping soon enough as well.

Lukentel, if you were notified by ANZ they will raise rate next week, I think other major bank lenders like Westpac will do the same.

I'll contact Westpac tomorrow morning and arrange a lock-in at 7.69% so I wouldn't have to 'gamble' again.


Alex, I thought fixed rate was also heavily dependent on the RBA rate.
Thanks for that info, frankly speaking it's something new for me.

 

[alexlee]

But in during those 3 years, I'm thinking to purchase my 1st IP as soon as the bank allows me to borrow again, but of course it will depend on my serviceability as well.
The reason I go for 3 years fixed loan is I tend to see the IR is gonna be going up than down, and also makes it easier for me to do my budgeting.

The reason why Simon asked, EP, is that there are usually significant break fees to refinance a loan that has a fixed rate. You may find that the break fees are costlier than the interest savings you may or may not get by fixing your loan.

In short, if you do plan on refinancing soon, consider just getting a variable loan.
Alex

 

[alexlee]

Alex, I thought fixed rate was also heavily dependent on the RBA rate.
Thanks for that info, frankly speaking it's something new for me.

Only if fixed rates were just simply the risk free rate +/- risk premium, with the RBA rate being the risk free rate. In reality, fixed rates are very much dependent on the demand and supply of money at various maturities. Between the previous rate rise and this current one, the fixed rate moved quite a bit.

Search the net for something called the yield curve, especially something called an 'inverse yield curve'. That might help. Both in theory and in reality you can have variable (RBA) rates moving in one direction and fixed rates moving in the other.
Alex

 

[EstatePreneur]

The reason why Simon asked, EP, is that there are usually significant break fees to refinance a loan that has a fixed rate. You may find that the break fees are costlier than the interest savings you may or may not get by fixing your loan.

In short, if you do plan on refinancing soon, consider just getting a variable loan.
Alex

Ah okay, I get it now Alex. How much sort of fees we're looking at if I want to refinance while still on a fixed loan? The thing is that I've already signed all the loan documents and I've lodged it back to Westpac.

I was also concerned about my serviceability for the next few years, that's why I went for the fixed loan, and I wouldn't have to worry if IR jumps up again in the next few years.

I'm currently self-employed, and not making much $$. But thankfully, I have enough reserve/savings to help me with repayment.

And also I went out looking for a job, and I've just been given a job offer with salary in the $40,000 range, but then I'll have to go through a 3 months probation period first.

 

[Spectre]

I was also concerned about my serviceability for the next few years, that's why I went for the fixed loan, and I wouldn't have to worry if IR jumps up again in the next few years.

I'm currently self-employed, and not making much $$. But thankfully, I have enough reserve/savings to help me with repayment.

And also I went out looking for a job, and I've just been given a job offer with salary in the $40,000 range, but then I'll have to go through a 3 months probation period first.

EP I think your logic is well founded given your present circumstances. If you see rates start to drop you can always break the fixed out at the same time.

I saw some clients tonight who were up in the 8's in a similar boat as you so they were happy with the mid 7's on a fixed as for them it was a case of budgeting and ability to afford rather than break costs.

End of the day you gotta do whats right for you...

Regards
Richard

 

[EstatePreneur]

That's right Richard. I'm just glad that at last someone is in support of my strategy/plan

Just rang the bank again...

Westpac said they have just raised their variable rate as of today which comes up to 8.32%.

Thank God! I'm so thankful when she said the fixed rate still remains the same, and tadaa, I decided to pay the $330 (payable on the settlement day horay!), some more paper works (don't!! i hate paperworx), rate locked in straight away! Bravo! I've finally decided to lock-in the rate at 7.69%.

Let's wait and see if this move is worth it, maybe as early as next week, all the banks may raise their fixed rate as well, especially the global economy isn't doing so well at the moment (US stock exchange, etc), I think this might affect the fixed rate as well very soon.

 

[Spectre]

EP
I can sympathise w/your logic but its moreso due to your present circumstances and trying to work within a budget.