by Scott Pape - August 11th 2011
“THE Banks Take a Gamble on Rates” said the headlines this week in response to CBA slashing their fixed rates by about 0.60 per cent (most of the other banks followed soon after).
Something just didn’t add up – my experience is that the banks leave the ‘gambling’ on rates to the average householder, who usually ends up losing out.
So let’s take a look at the figures:
The official standard variable rate at the CBA is 7.8 per cent (which next to no-one pays – there’s usually a ‘bonus discount’ that brings the real rate down to about 7.5 per cent). Now as a result of the cuts this week you can get a three-year fixed rate at 6.59 per cent, and for five years you can lock in at 6.99 per cent.
THE wash-up is that you can get a half a per cent saving right now by locking in a lower rate for five years. Some commentators have correctly argued that the banks are predicting that interest rates will remain relatively low over the next few years.
True, but they aren’t gambling.
Since Wayne Swan banned exit fees, the banks have had to find another way to stop their customers from switching to get a better deal. Fixed rate deals give them that power.
CBA’s fixed rate deals whack you with a $600 establishment fee at the start, and if interest rates drop lower than your fixed rate they will slug you with a ‘break fee’ representing the difference between the two rates, multiplied by the length of time left on your fixed contract – which can add up to thousands of dollars.
If you’re really struggling, locking in your rates can give you the security of fixed repayments, but for everyone else it’s too much of a gamble.
Tread Your Own Path!
Photo: http://farm1.static.flickr.com/93/272871249_e7c25dd564_z.jpg?zz=1
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7 comments
Buyer Beware of the Dangling Carrot!
Fixed rates have dropped big time, but can you fix it for 2 or 3 years.
Over time the average Loan interest rate is just over 7%, so @ 6.59% it seems the public could be winning at the moment.
3 years ago, when the GFC hit, fixed rates dropped below 5%, the question is will that happen again?
fixed rates are only lower when the economists/ strategists at the banks think that the variable rates are on the way down in the near / medium future.
I still feel for those poor buggers that fixed in at 8-9% in 2008. My friend was one of them. Best bet is to look at the average fixed rate for the past 10-20 years and decide if its a good deal. Love to be in america now with their rates, and their ability to have long long long term fixed rates! Mind you, you need a job to begin with, and that is harder than finding an economist that knows what tomorrows stock report is going to be!
I compared their new fixed rate with their old and noticed the gap between the new fixed and their comparable has grown. A case of look at the right hand while I pick your pocket with the left?
And now the ANZ has a go: ANZ is cutting its fixed mortgage rates by up to 0.60%pa, effective Wednesday 17 August.
Bottom line – never trust a bank – full stop.