Do the Number

Let’s quickly do the number of  $350,000 home loan from Commonwealth Bank, the biggest lender in Australia. The current rate is 6.39% (for fixed rate) and 5.74% (for variable rate) and most likely only very little number pay that rate as somehow everybody qualify for “professional discount” or “wealth package discount” of 0.7% for variable rate but only 0.15% for fixed rate.  Commbank already announces that they will only pass 0.1% of the cut to their customer despite 0.25% cut of benchmark interest rate. Therefore, the final interest rate would be 6.24% (for 5 years fixed rate) and 4.94% (for variable rate) – assuming the fixed rate will be cut at the same rate as the variable (unlikely)

If you switch now you will be worse off by $264 per month. That’s not including the upfront establishment fee just to change from variable to fixed rate. This significant difference is the direct cause of that 1.2% difference of the interest rate between the fix and the variable. It simply too wide.

So, yes, at this moment do NOT fix your mortgage. The situation is not unique to Commonwealth Bank only, it will be quite common. If you do have that extra money to convert to fixed rate, then these are some suggestions that you need to consider in order to priority:

• Use the money to pay up loan with higher debt, for example credit card debt or car loan or other personal loan. Mortgage / homeloan is usually the cheapest debt you can get, so if you have other debt with higher rate do that one first.
• Put that money into your offset account to reduce the principal of the loan while building you up an emergency cash that you can access when there is a need.
• Put that $264 as extra repayment on your mortgage. This will save you thousands of dollar during the duration of your homeloan

When actually switching to the fixed rate is a better option:

1. When you really cannot afford further hike in the interest rate
2. The different between the fixed rate and the variable rate is below 0.6%-0.7% (so take only 2-3 interest rate hike before break even)
3. When you expect the economy to heats up: increasing stock market price or/and property market, increase GDP, government anticipate high inflation, etc
4. If the lender require you to have a fixed rate (usually if the lender doubt that you can sustain further interest rate increase)

In my opinion, while we are already past the worst chunk of the economy crisis, it will be at least another year before the economy take off again (and potentially make the interest rate higher in fear of inflation), but in the meantime the interest rate will stay around the same as it has only little bit room to go down.

A Big Relief for Gracious Australian

For a loan of 350k, a 30-years-mortgage holder Australian was paying around 9% interest rate on September 2008. That’s a repayment of $2816 per month. After these strings of cut, the same mortgage will cost only around 5% interest rate on April 2009, or a repayment of $1879. A huge saving of $937 per month. But as mentioned on other article here and here, the Aussie have more to cheer on: an average family with 2 school-age kids will also have huge $5600 real free money (tax free) from government since December 2008. (The detail is: 2x$1000 x’mas bonus per child,2x$900 back to school bonus per child, 2x$900 tax stimulus per tax payer)

As final word, with this good position we should all be gracious and maximize this condition to improve your financial position.

My medium term outlook will be looking economics to make a turn to the positive again but not that fast. It will takes 2-3 years before we are thinking about be in the similar condition before credit crunch hit the world.

Hope this helps

So, if you are sitting on the fence wondering whether to buy or rent a property, read on below, made up your mind and go get your property ! Of course, this apply also for all the property investor out there ! Good long term investment that cannot be more obvious than this…

Reason Why You Should Buy Now!

1. The price of the property itself is lower than previous year
2. The interest rate for the home loan is at record low. Do you know that the official interest rate now is sitting at 45 years low ? Means: the only cheaper than this was 45 years ago!
3. Government give you free money (Sorry, Aussie only): For NSW resident you will get maximum $24,000 to buy a brand new home ($21,000 if you live outside NSW) or $14,000 if you buy existing one. Read this for more info.
4. The renting is more expensive than buying:
   • Rent 2 bedroom unit cost you $350 per week, or around $1516 per month ($350 x 52 weeks then divide by 12 months)
   • You can buy 2 bedroom unit at $250,000. With interest rate of home loan around 5%, your monthly payment will be only around $1342 per month.
   • Check your number online here (The actual repayment after all cost only can be determined after all paperwork has been submitted)
5. You don’t want to compete with the migrant from overseas. Sydney only, received an inflow of thousands migrant per week. Sooner or later they will need their own place to call home, their best alternative will only RENTING (they are not eligible to take home loan before become permanent resident), then you don’t want to compete with them for a place for rent in Sydney. Buy one for yourself. Remember, especially if your rent is out of your initial contract, your land lord can actually increase the rent every single month. If somebody offer the landlord $400 a week rental and you only pay $290 a week since you have been living there for years, if you were the land lord who do you choose ?
6. With building industry is also in recession (less and less new property is available) while the migrant to Australia is still in high number, it’s only time before the price of the property will shoot up again. At the end the fundamental of economy of supply and demand will take charge. At this moment, supply is in abundance, get that one quickly before it become rare.

What to do Now?

1. Go find a good mortgage broker. Ask me if you don’t have one! Why You Should Always Use Mortgage Broker For Your Homeloan
2. Go home hunting in the internet NOW!
3. Meet with your mortgage broker first, before inspecting the property!
4. Start tidy up your document. Your broker will need it soon: Official ID, bank statement, bill statement, loan statement, salary slip, etc…

Read this article for more info: Getting Your First Home Loan or Mortgage: Not That Hard!

Happy home hunting !