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.
