FYI | Jul 30 2013
By Peter Switzer, Switzer Super Report
Being known and hailed in the media as a so-called money guru effectively means that most people are more likely to ask me about what the RBA is going to do before they ask me how I am!
And while I know I sound like I’m a shares junkie in most of my writings and media appearances, that’s only because I suspect many of my subscribers and viewers feel more vulnerable when it comes to stocks. However, as an investor, financial planner and personal wealth builder, I have a very healthy respect for property.
Now or never?
So as we await the RBA’s decision next Tuesday, which will clearly affect those of you who are dreading the short-term fate of term deposits, the big question everyone is asking me is – is it time to fix my rate?
By the way, lots of our subscribers also have mortgages and, clearly, the better your day-to-day decisions on any money front, the better the implications for your future wealth.
Of course, this question is not an easy one to answer, as I think we will see at least one more rate cut from the RBA and I hope it’s next week. It should then be uphill until then for rates. It will take time but I wouldn’t be surprised to see the first rise later in 2014. In fact, I hope so, as it will confirm that Australia, the USA and the European economies are on the way back.
This will help add power to this great bull market, which has seen our market go up around 85% since March 2009, if you add in dividends. In fact, with grossed up dividends, thanks to franking credits, we are back in front, provided your portfolio of stocks is as good, if not better than, the All Ords.
Anyway, back to the task at hand. For investors, or those with mortgages on their principal home, where they know they won’t be moving in the next five years, the five-year fixed rate looks hard to ignore right now.
The best rates
UBank for refinancing has a 5.16% rate, which on a comparison or AAPR basis is 4.99%. State Custodian has a 5.53% product, which is effectively a 5.05% rate. Looking at the big banks, the NAB is the best with a 5.65% rate, which, on a comparison basis, ends up as 6.01%. On this comparison rate basis, the CBA is at 6.08%, ANZ 6.12% and Westpac is 6.15%.
Why do I focus on the five-year rate? That’s simple, interest rates will start rising again and they could be over these rates within two and a half years, and so if you chose three-year fixed, you could be rolling off these good rates just as rates were rising.
What are the pitfalls?
Well, I could be wrong and a worse recession lies ahead and rates would fall further but you’d still be locked into great rates anyway, so the gamble is worth thinking about.
Another problem could be the break cost if you want to get out of the loan early, but if you want to get out when rates are higher, the cost should not be shocking. When you want to get out of a high fixed-rate contract to access lower rates, the slug is hard.
For standard variable investment loan rates, loans.com.au has the best rate at 4.75%, which really is 4.78%, to be precise. State Custodians offer 4.99%, which is really 4.89%, while UBank is 4.87% for both rates.
Big bank loan-wise shows their standard offerings are as follows, NAB at 5.92% (5.93%), ANZ 6.13% (6.23%), CBA 6.15% (6.30%), Westpac 6.26% (6.4%).
By the way, these rates are the same as the standard variable home loan rates for ordinary borrowers, as opposed to would-be property investors.
In case you didn’t know this, fixed rates are not directly linked to what happens to the cash rate, while standard variable rates are.
I think global interest rates are now in their trough and the only way is up, and that’s why I think we’re close to the bottom of fixed rates. Sure, there could be some more competitive cuts, but I can’t see them going all that much lower, unless the ‘you know what’ hits the fan, and I don’t expect this to happen.
By the way, when fixed rates start moving up, they can be by quite a significant jump.
One final piece of advice – always ask for the comparison rate as this includes the fees and charges, which are left out of the headline rate of interest, which always sucks a lot of people in when they see those standout ads in newspapers and on websites.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
Content included in this article is not by association necessarily the view of FNArena (see our disclaimer).
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
