CBA Raises Fixed Interest Rates

Interest rates were bound to rise, but did anyone think that this would happen this week? In the news today, CBA announced that they be increasing its fixed rates but will leave the 12 months rates alone.

With the Reserved Bank of Australia (RBA) reducing the cash rates just 3 weeks ago due to a forecast of a weaker economy ahead, why is CBA then increasing its fixed rates? We all know when the RBA reduced rates 3 weeks ago, most of the banks could not pass on the full rate reduction stating cost of funds are too high and therefore, to pass the full rate reduction is just not economically feasible. Now is this true? Well I think that part of this could be related to us as investors of bank shares. We have been seeking higher dividends year on year and in the same economic climate, we are still seeking the same level of return for our investments.

I believe that companies (IE banks) these days should look after their customers and not just shareholders. If they do not then consumers will seek alternative banking solutions. The other side of the equation is, if the banks did look after the customers, then the shareholders might lose on the income. So the challenge here is to find a balance for both camps. We are also seeing a lot more owner managed type banks such as Bank of Queensland and community banks like Bendigo Bank are just a couple of examples whereby consumers will feel a sense of belonging to a financial institution who cares about their customers.

Now back to the fixed rate, it is known that when interest rates move, especially with the fixed rate, the variable rate should move in the same direction in time with it as well. This is because the fixed rate is an indication of where the variable rate will be heading. Economist in the banks utilise economic models to create hypothesis on a prediction of rates in the future. So when the banks starts to increase their fixed rate, this will be a test to see if the RBA will continue reduce interest rates any further in the coming months.

We have also seen after CBA has raised their fixed rates, WBC and NAB follow suit. Should the other banks follow CBA's lead in increasing their fixed rate, this may start a trend of interest rates rising. So the next question is should I now start to fix my interest rate or wait? If I had a dollar every time someone asks me this question I would be well and truly retired!

So let's discuss a little about fixed rates and why someone should fix their interest rates. Like anything there is a reason to do something and it's a question of lifestyle. Whether it be staying at home and doing gardening or going out on weekends. Everyone is different. So what has lifestyle got to do with fixing your interest rate, well my argument is that it has a lot to do with their lifestyle. How you save, and how you spend your well earned money it has all to do with lifestyle. So to fix or not to fix? Do you need to have a routine with your finances? Do you need a plan to assist you with your budgeting? Do you need help in meeting some of your monthly expenses including lifestyle expenses? If you had answer yes to most the these question, then I would suggest that you consider fixed some if not all of your mortgage.

By fixing your interest rate, this will give you some routine, in that you know how much you will need to put in every month towards your loan. The other aspect of fixing interest rate is that it will stop the interest rate from rising. Thus should the rate increase by say 1% you rate will remain at the rate that you had fixed.

What are the negatives towards fixing? Well the reverse will occur, you will lose the flexibility in repaying your loans earlier or putting in lump sum money. If you had equity in your property most banks will not allow you to redraw from your fixed rate account. Only a couple of banks will allow redraw from a fixed rate loan but majority will not. Should you wish to put more money into a fixed rate loan, the banks may change you a fee for doing so. The other negative is should the rates decrease then you will not get the benefit of the further rate decrease.

So what is your lifestyle? Do you need to fix or remain as variable? If you are finding it hard to answer some of these questions, I would recommend that you speak with your accountant, financial planner or your broker or a combination of them. Arm yourself with the right information and make the right decisions.

Switching Home Loans in this current climate

With low Home Loan interest rate at the level that it is, I am observing increasing number of people trying to get out of their current fixed rate that they had locked in over a year ago.

It is easy to see why consumers may be quick to conclude that they can save on interest charges when they see the difference between their fixed rate (eg: 7.5%) and the current interest rate (eg: 5%). Furthermore, banking and non-banking institutions alike are advertising their products and services the way all clever advertisements are designed to do - which is to attract consumers to use their products. Nothing wrong with such marketing strategies such as honeymoon rates, no ongoing fees and credit cards with no annual fees...for consumers who read every fine print and pay attention to the smallest detail.

It is a good idea for consumers considering such offers to find a mortgage broker or discuss with your existing broker about the cost of switching home loans. In the early '90s, people with mortgages switched home loans on average every 7 years. Nowadays, it's more likely every 3-4 years. A very plausible explanation of this could be due to the increase in the number of mortgage brokers who were coming out of the banking industry. Consumers with existing mortgages began to hear more often (from broker channels) about the savings they could incur if they switch home loans.

There are a few reasons why people should switch home loans but the most common reason would be to save costs whether it be in monthly repayments, in the shorter term or in the longer term. Some people, particularly investors, may well decide not to switch loans for a given tax advantage even if the costs are higher.

So, the question that every consumer really needs to ask is, will this switch save me money?

Switching home loans is, in most cases, relatively easy but tedious as you will have to do the paperwork all over again. When you switch, you will be up for some costs such as:

* Deferred Establishment Fees,
* Early Penalty Fees,
* Discharge of Mortgage,
* Registration of Mortgage,
* Application Fees,
* Package Fees (of the new loan),
* Valuation Fees,
* Bank Legal Fees,
* Peruse Document Fees (if you have a company or trust).

Some of these costs are bank fees and some are government charges. But regardless, please always ask the question how much will it cost for me to refinance or switch loans. Once you have the numbers, do a quick calculation to see when you will break even after switching. For example, when you switch a $300,000 loan, an indicative break cost could be $10,000 (depending on the bank, loan and other factors). The interest that you will save is 3% per annum. This means that you will break even, and start to save money after the 14th month. The first 14 months will be the time taken to recoup the $10,000 to switch loans.

The decision to switch loans is ultimately yours. Your broker can help equip you with the numbers and the numbers will tell you the story. If the costs are not too high, then it might be a good idea. Otherwise, sticking with your current loan facility is not such a bad idea.

Your broker should provide you with a Broker Contract that will disclose what he/she is paid or the range of commission they will receive when you switch loan.

Banking Errors on your Home Loan Statements

I have recently received a software that will check home loan bank statements. You can easily procure this software by doing a google search on Loan Checker. Care, there are 2 versions of this software in Australia. Here is the link, http://www.theloanchecker.com.au.

I found this software to be very informative. It will check the trail of money going in and out of the loan account. I have since keyed in a set of mortgage statements and noticed that there are some discrepancies even within a short period of 6 months. However it is not big enough to seek a reimbursement from the bank. This has also been shown on A Current Affairs in Australia. My curiosity has gotten to me and thus the purchase of the software.

Now if I can find discrepancies within a 6 month period, the probability of finding a greater variance for a longer term loan will be more pronounced. I am willing to invest my time to test this theory out and I will be offering my readers a FREE service (free to the first 50) where by I will input all the figures on your bank statement into my software and will provide you with a report and perhaps a sample letter for you to send to your bank for reimbursement. If you are keen, please register on my website, www.myhomeloansbroker.com.au.