When it comes to investor finance, everything is about the numbers. Having been in the game a few years, I spend my life talking numbers with clients – interest rate percentages, LVR’s, property values, etc
Because I do, it upsets me when I see people trying to make the numbers say something that they’re not actually saying. Now there’s a lot of chatter in the industry about interest rates, particularly fixed rates, which are very low and very attractive.
But a recent article, in an industry publication of all things, went so far as to try and make them seem much better than they actually are. Way too much better.
Now don’t get me wrong here, I’m not against fixed rates. For some investors in some circumstances, they can be perfect! But rate isn’t the most important issue and that’s why I got a little upset when I saw an “unspecified source” being quoted in this article as using a very suspect method for claiming how much better fixed rates are than variable.
The premise for the article then was something like this. The Variable Rate over the last 14 Years has averaged 6.85%. Today you can get a 3yr Fixed Rate is 4.99% That’s a difference of 1.86% so therefore you can save $XXXX by fixing your rate now!
The trouble is you don’t actually save that amount. Not now. Not in the future. Not even in the past.
All that’s happened in this article is they’ve arbitrarily chosen a larger amount to make something look smaller than it actually is. In doing so they’ve highlight the problem with comparing fixed rates to variable rates. It’s just not an easy thing to do.
You might think it’s as easy as comparing the Variable Rate as it is now to the current FIxed Rate right? But it’s not that simple either. You see, Fixed Rates usually range from 1 to 7 years. Some can even be taken out over 15 years. So even if you wanted to make an accurate comparison, you couldn’t because lenders apply a different Fixed Rate over different time periods.
So, if you had an agenda to promote only Fixed Rates you could easily create a misleading picture of how they compare to Variable Rates. Simply by comparing the lowest Fixed Rate to the highest Variable over whatever time period you wanted to choose to suit your own agenda. That’s clearly what the article I read was doing.
Now when you compare the current rates scenario, the Fixed Rate does look better on face value, although not by anywhere near the amount they quoted in the article.
Current Variable Rates are getting down as low as 5.08% in some circumstances but 5.25% is more common so the difference is quite small compared to 4.99% for a Fixed Rate. Certainly a lot different to the “average” rate over 14 years that was chosen to give a 6.85% rate. And just because the Variable Rate has averaged that figure doesn’t mean you will “save” 1.86% by fixing now at 4.99%.
A more realistic comparison is this. Currently you can get around 5.08% Variable Rate on a $300,000 loan but some Lenders will charge slightly higher than that. If you were to chose a Fixed Rate on that same amount at 4.99%, you can readily see that the difference is actually very small.
Now that difference will change every time there is a movement in Variable Rates, either up or down when compared to the Fixed Rate (which usually only applies for a small part of the loan term). Does that mean that if you have a Fixed Rate, you are losing every time the Variable Rate goes down because the amount of “savings” you were making has reduced as well? Of course not.
Once you fix your rate, you know where you stand against the current Variable Rate, not some statistical average.
Consider this. Once you have fixed your rate, the only meaningful change that will affect you is the change that occurs to the Variable Rate immediately prior to when your Fixed Rate expires and that could be anywhere up to 15 years. Only then will you need to consider how rates stand, so you can decide which way you will go, either variable or fixed again. Only then does the difference between variable and fixed rates have an impact on you because you have to decide on the direction you want to take.
The important thing to remember is that if you have a Variable Rate right now, around 5.25% for example, you are well under the statistical average anyway. No need to panic. (And you certainly won’t “save” 1.86% if you decide to fix.)
To me, Fixed Rates exist for a reason. They give you predictability and stability in your repayments because they don’t change for a fixed period. They are not about saving some “theoretical” money by comparing them to statistical averages. Compare what is available RIGHT NOW for variable and fixed rates. Consider if you have any need to refinance or sell within the fixed period you are looking at, before locking in your deal. Remember that breaking a Fixed Rate term can cost you money.
Nothing is more certain than the fact that Fixed Rates will change over time. Whether they go up or down is another matter, but they will change. What’s important is to decide on what is in front of you today rather than speculating on what might happen in the future or what has happened in the past.
If you’d like someone to talk to, who will give you some common sense advice on rates, not some misleading historical averages, please feel free to call me or email Vincent.firstname.lastname@example.org