Newsletter Articles

Fixed Rate Mortgages

Some analysts are of the view that we have reached the bottom of the interest rate cycle. Borrowers are expressing more interest in Fixed Rates as being an appropriate measure for managing their debt and for budgeting. So, now is an appropriate time for 6 Point Finance to again elaborate on how fixed rates and variable rates are calculated.

Banks want satisfactory margins on both fixed and variable rate loans. The difference is not the margin, rather the funding method and cost to acquire the money.

Variable and fixed rates are set differently. Variable rates are set by the lender by adding a margin to the price they are paying for their money from the Reserve Bank of Australia (RBA) and other wholesale markets (insurance companies, superannuation companies or overseas).

Fixed rate is more complicated in that the lenders need to source fixed term funds e.g. 2 year, 3 year or 5 year from their funding sources. These sources will endeavour to foresee (use their crystal balls) what rates will do in the future and set their rates accordingly.

When the bank advances a fixed rate loan they are sourcing their funds on the same fixed term from their funding source.

If the Bank/Lender breaks the fixed term with their source due to their customer breaking the fixed term, substantial pre-determination costs apply and the lender passes these on to the borrower/customer.

Borrowers need to be aware that there is a lot more to Fixed Rates than trying to ”predict” what rates may do in the future. Fixed rates give borrowers some budgeting certainty but the sting in the tail is if your circumstances dictate that you need to repay/refinance the loan early; exit costs can be $10,000's.

The following table is to provide you with an appreciation of what various lenders are presently charging for variable and fixed rate loans. Remember that the Lender's margins are similar for fixed and variable rate loans and the difference is the cost of borrowing the funds from their sources. It is evident that the cost for fixed rate money is presently higher.

Lender	Standard Variable Rate	2-Year Fixed Rate	3-Year Fixed Rate
CBA	5.74%	5.94%	6.69%
Westpac	5.81%	5.99%	6.59%
ANZ	5.81%	5.69%	6.34%
NAB/Homeside	5.74%	5.79%	6.49%

These rates are current for standard home loan products as at 13th July 2009, are subject to change, subject to credit approval; fees and charges apply.

Talk to your 6 Point consultant today.