Fixed mortgages do we pay a premium ?

[mals69]

Doing calculations on a bank calculator it showed I was saving more on a floating rate over the same time period and interest rate than on a fixed loan.

Is there a type of insurance charge built into the fixed ? Is one calculated daily etc ?

[roseneath_rat]

Actually you are paying a small premium on floating rates over cost of funds at the moment. Fixed rate margins are around 0.70% over cost, whereas floating is typically approx 1.5%. Is this what you meant?

Historically, or at least after the current monetary policy was introduced in the early 90's it has been cheaper on average to stay on a floating rate. This changed around 2003 as steady increases in floating rates and margins on funding costs altered.

[Mark_B]

It all comes down to their cost of money(whether fixed or floating is cheaper)

From a consumer's perspective, taking a fixed rate mortgage is about buying surety in an unsure world (locking a rate in so you know for sure what you're going to pay).

For some people that surety is worth alot (call it "interest rate insurance").

It's easy in retrospect (or with a myriad of assumptions) to say one is better than the other, but in truth the decision isn't that simple.

However, my understanding is the same as RR's in that historically lenders on floating rates have tended to pay less than those on fixed rates over a given time period.

Also, some people (I am not saying you) incorrectly think that if they fix their rates and then interest rates rise, that they have won and the bank has lost. That is incorrect. On a fixed rate mortgage the bank is guaranteed to make a profit from the moment you sign on the dotted line.

M

ps. Nice Torana.

[mals69]

Thank you, interesting info in your posts.



(Cheers, 70 Camaro )

[Mark_B]

Cheers, 70 Camaro

Apologies

Though in the thumbnail at a glance I was sure it was an XU-1.

[Anita]

Guys and Gals, how does it work, when we 'break away' from a Fxd Mgge - let's say , Fixed loan for 5 years for 8.75%, and needing to break if the current rate for the same term is higher than 8.75% - would the banks still charge a 'penalty' for 'break away cost' ON TOP of the normal 'admin' fee? How does it work? Would this be different from bank to bank? I mean from Mainstream banks. I got a similar situation, with Westpac, for a mgge for $450k locked for 5 years for 8.75% - only 1 year passed, asking me to pay $23,000 if I break the term., even when the current market rent ( then, when I queried ) was over the 8.75%. Now, of course, the 5 year rate is lesser nd they ask more?

My friend with BNZ whose fixed term broke ( whilst current market rate was higher) been asked to pay some $360 fee only.

Could this be true? How does it get calculated? Shouldn't there be uniformity across banks/at least across mainstream banks.?

I can remember we did similar with ANZ/National in the past when the current rates were higher than the fixed and they didn't charge the 'break away ' cost, but some $25o or similar for 'early termination' or some sort. And was great.

Anybody out there pls to shed some light re this ? With figures and calculations to work thro' how and why and substantiate this a bit more comprehenisvely. Many Thanks folks.

[Keithw]

In the past the break cost was 1 months interest (at your fixed rate) for each year or part year left to run.
So a five year fixed loan broken in the first year would be 5 x 1 months interest.
Check your loan documentation.

As you point out, if the current rates are higher than the one you are breaking, I would have thought in normal times, that makes it easier for the bank to relend, but perhaps right now, while they are not doing any lending, they don't want to have people breaking their loans.

[roseneath_rat]

Keith, break costs are based on a formula that takes into account a few variables:
1. How long you have to run on your loan
2. The current interest rate you are on
3. The market rate for the remaining term to run

The longer until the expiry of the fixed rate, and the larger the differential between the current rate & market rate the higher the break cost.

Many lenders also charge an administration fee for breaking of $200-500 per loan.

[spurner]

Normally it makes the most financial sense to break loan terms BEFORE the rates actually come down. Now rates have already been reduced, you're unlikely to get any financial benefit out of breaking and trying to refix at a lower rate.

An exception might be if you have not too long left on your current loan, and you think rates are going up soon, it would be good to break and pay the fee, and lock into a lower rate.

[Fobby]

Kiwibank's Fixed Term Break formula

See page 13 for Kiwibank's fixed term break formula http://www.kiwibank.co.nz/about/pdf/home_loan_tac.pdf