What should I do...Locked into high interest rate..Help!

[DRUSS]

Hi Guys,

When I got my home loan I thought the best thing was to lock in my home loan thinking it wouldnt get much lower...

these are the details:

Commonwealth Bank
Account Balance Avail Funds Method Of Operation
Home Loan $180,064.98 DR Either to operate
Redraw $2,773.00 CR Nil Either to operate

Term/Interest information Details
Remaining loan term based on direct debit repayment 21 years 11 months
Remaining loan term based on current required repayment 28 years 6 months
Contracted loan term 30 years
Interest rate % pa 8.29%
Loan repayment type Principal and Interest
Interest rate type Fixed Expiry date 07/12/2012

Payment information Amount Next due date Detail/Account number
Payment frequency Fortnightly
Payment method Direct debit
Required monthly payment $1,374.00 CR 07/06/2009
Direct debit payment $687.00 CR 05/06/2009

Tax n Int. This accrual period Last financial year This financial year
Loan interest $820.44 $13,340.72 $13,790.43

____________________________

What should I do. I was thinking to ring the bank and see how much it is to break the loan. From memory I think it was like $3000, but don't quote me on that. I just want a better deal..

Any recommendations on what to do...
I also want to purchase another property within 12months from now, so I was thinking to change to a LOC account?

Any help or insight appreciated.

Cheers
Daniel

 

[DRUSS]

I just found out from the bank its $14,450 to break the loan plus a $300 switching fee..arghhh.

 

[Hooray]

Why did you fix the rate in the first place? Because you'd be protected against further rate rises? It's working like you wanted it to, then.

You have 3 choices:
1) Live with it
2) Pay the break fee
3) Wait until variable rates go up and then pay a smaller break fee

 

[DRUSS]

Let me tell you Ive learned from my mistake... I was 19 when I got the loan and thought I had done my due diligence

I researched quite a bit actually and thought that the interest rates wouldnt get much lower..guess I was wrong. Looks like I'll have to ride it out. Sucks too, as I wanted a LOC account.

 

[csc]

Why did you fix the rate in the first place? Because you'd be protected against further rate rises? It's working like you wanted it to, then.

You have 3 choices:
1) Live with it
2) Pay the break fee
3) Wait until variable rates go up and then pay a smaller break fee

Ditto.....over the term of the loan though you will probably pay no more than anyone else.............

i guess you want to break and renew at a lower rate...........do your homework properly first cause you cant lock in a lower rate forever.........banks are not stupid, they will make money from you sooner or later unless you pay the loan out at a low rate super quick...

good luck

 

[Spectre]

Have you thought of
switch the loan to i/o
Dont break the rate
move out and rent & shift the debt to deductable. Same time, gear up on the available equity and look at ip2

 

[Ausprop]

don't despair too much - some of us have variable rates higher than that! when inflation breaks out it will seem like a good idea anyway.

 

[Peter_Tersteeg]

It's a ***** and you're certainly not alone. 18 months ago the government was putting pressure on the RBA to increase rates to curb the mining boom and petrol prices(which had very little to do with rates). We suffered high rates as a result, with the promise of further increases.

Then the credit crunch hits (and we all knew it was coming, but didn't really understand the implications) and the pressure reverses to lower rates. The problem is that the RBA panicked and massively cut rates in a very short period of time.

Had they controlled the process better with 0.25% or 0.5% cuts over a longer period, people would have had the opportunity to get out of fixed rate loans before the costs got prohibitive. It might have even given the economy time to settle into the rate cuts so the effects could be more effectively measures, thus avoiding the need for what I consider knee jerk reaction stimulus packages (don't even get me started on that!)

Now the government is telling the banks to be more accommodating and trying to find ways to help consumers. The truth is the banks have very little to do with the pricing of fixed rates, they also enter into a fixed price contract with third parties such as super funds - fixed rates are not funded by the RBA. As a result, if the bank has to pay penalties to their funders for exiting a fixed rate early, they will pass the costs on to the consumer as per the contract the consumer signed.

The lesson to be learned is that fixed rates are a risk mitigation strategy and should not be viewed as a money savings strategy.

I certainly feel Daniel's pain as I have similar loans myself, but I also know that I would have had trouble making repayments with double digit interest rates so I can live with it.

 

[Rolf Latham]

Actually, you werent wrong ...........

You made a decision on data available to you at the time.

I dont see how thats "wrong "

ta
rolf

 

[xcesiv]

I dont know how this would work, but what about getting another loan at a lower rate and then tip all that into the Higher interest rate loan.

If you can afford to get a 30k Loan or more at say 5.5% and pay that full amount off the loan in 1 lump sum and pay 2 seperate loans

If you got the to 150k @8.29% and a 30k loan @ 5.5%

Rough saving could be $100 a month by my quick calcs

Only works if u have the affordability to draw upto $210k

 

[wylie]

I thought that locking in the rate (generally) means there is a restriction on making extra repayments to that loan for the period of the lock in?

 

[marg4000]

With all the money being printed by most countries and all the stimulus packages swilling around the economies, it is only a matter of time before inflation kicks in and interest rates climb.

You are locked in to this rate until December 2012 - 3 1/2 years away.

Do you really believe interest rates will stay low for all of that time?

If so, get out your calculator and do your sums. Make a decision based on the figures. Frankly, I would not panic. The amount you borrowed is modest and the repayments aren't onerous.
Marg

 

[Peter_Tersteeg]

I dont know how this would work, but what about getting another loan at a lower rate and then tip all that into the Higher interest rate loan.

If you can afford to get a 30k Loan or more at say 5.5% and pay that full amount off the loan in 1 lump sum and pay 2 seperate loans

If you got the to 150k @8.29% and a 30k loan @ 5.5%

Rough saving could be $100 a month by my quick calcs

Only works if u have the affordability to draw upto $210k

This could work depending on the lender you're with, but there's two catches.

1. Most lenders will charge you the penalties if you pay down more than $5k->$15k in a year. There are a few exceptions, but this doesn't include the majors.

2. You'll need some equity in another property to secure the second loan against (second mortgages generally cost a lot more than 8.29%).

 

[hobo-jo]

I dont know how this would work, but what about getting another loan at a lower rate and then tip all that into the Higher interest rate loan.

If you can afford to get a 30k Loan or more at say 5.5% and pay that full amount off the loan in 1 lump sum and pay 2 seperate loans

If you got the to 150k @8.29% and a 30k loan @ 5.5%

Rough saving could be $100 a month by my quick calcs

Only works if u have the affordability to draw upto $210k

Wow xcesiv, GREAT post. That's thinking outside the square! I currently have a $250k debt I have been thinking about fixing at this point for 5 years. I also have a $80k LOC I could draw against (all on same property). I have a 100% offset account on the larger mortgage so if I fix and rates stay low/get lower I can just park the $80k from the LOC into the offset account to at least partially offset the choice to fix. Had never thought of that. Thanks

 

[Perp]

The lesson to be learned is that fixed rates are a risk mitigation strategy and should not be viewed as a money savings strategy.

Actually, you werent wrong ...........

You made a decision on data available to you at the time.

Heartily agree with both these viewpoints. You fix because the repayment associated with fixing is what you're happy with (or the most you can afford), and you want certainty in your repayments.

You know when you lock in a rate that rates could go higher or lower; you effectively say "I'm happy to forgo the potential savings associated with a lower rate, in exchange for the comfort I derive from knowing that I won't have to pay a higher rate". You got exactly what you bargained for.

 

[keithj]

The lesson to be learned is that fixed rates are a risk mitigation strategy and should not be viewed as a money savings strategy.

I think the lessons to be learned -

• Fix early in the cycle when fixed rates are below their long term average & fix for 5+ yrs. This has the advantage of risk mitigation & the possibility of saving $$$.
• If you need to fix late in the cycle (eg early 2008 when rates were above long term average) for risk mitigation, then fix for 1-2 yrs max. This provides risk mitigation, but is less likely to save $$$.
• If you expect rates to fall rapidly (eg mid/late 2008), then wear the break costs early - they will only get worse.

The above shows the 30day rate (blue) & the 5 yr bond rate (red) from Jan 2007 till late May. Fixed rates have been rising fairly steeply since early Feb - I'd expect variable rates to follow at some stage & overtake within a 5 yr timeframe.