Fixed rates

Crown Money, where we show you how to pay your home loan off in up to half the time of a normal bank loan. Welcome to the Crown Money podcast. I'm Jesse Edge and I'm joined by Scott Parry.

Hey, how are you, Jess?

I'm good. How you going?

Not too bad, not too bad. Today is a fun discussion around fixed rates.

There's been a lot of discussion in the media, hasn't there?

Huge amount of discussion and for a lot of people it's scary. It shouldn't be scary for our Crown clients because you're doing something which no one else is doing, which is paying house off in under 15 years. But if you're on a 30 year loan with the banks, you definitely should be scared. We foresee a 1.5% rate rise over the next 18 months. That's a fair bit. But you got to take into account we've been on emergency level interest rates. Emergency 0.1% was the cash rate. Like the banks dropped them down or the reserve bank dropped them down during the COVID despair and freak out. So now it's time to get back to reality. And so everyone's been making bank paying huge amounts off their loan each and every year. With these low rates, you could pay more off the principal, which is phenomenal. Average client paying 32,400 a year off the principal. And every 23 days, the client paying off their house. So now I want to just give you guys a little bit of a backstory as to how fixed rates work, because it's very interesting to know. Fixed rates don't move when variable rates move. Fixed rates move six to nine months before variable rates move. Why is that? Well, banks are there to make money, and so they don't want to give you fixed rates at great rates when you want to fix. And so I sent an email to every single client in August saying, if you want to fix, now's the time. This is the cheapest of fixed rates will ever be for the rest of your life. We had a lot of clients take that up, which is phenomenal. But we're now getting a lot of clients saying, oh, I want to fix now. August was in time too late, isn't it? Because banks now know that you're wanting to fix. And so they've priced the fixed rates one and a half percent above the standard variable. They're there to make money out of you. And so over 20 years of doing this, our clients have run off a variable rate, have always performed better than what a fixed rate client has done. Because obviously the banks are going to make money and you're going to be paying a lot more interest today for that fixed rate because it's higher than what the variable rate is. And it's not that when the actual fixed rate or the variable rate hits a fixed rate, that's when you start making money. You've got to claw back all that extra interest you've been paying between now and when the actual variable rate gets to the fixed rate. And then it's got to go way past the fixed rate to then be in front. So the chance of that happening a few and far between.

Yeah, it's a tough one. And I think with fixed rates you're always trying to predict what's going to happen in the future and everything is so tumultuous at the moment, there's just no way of knowing. So I agree. Fixed rates, you should have been doing it last year. They were incredibly low, really competitive. They're trying to draw people in. But we've passed the mark now. But I think we've got a little bit of perspective. The rates are still incredibly low, like incredibly low. For a long time they were in the 6, 7, 8%. In our parents time, they're in the 17%, which is insane. I mean, their houses were a little bit cheaper than ours are. So I think we've got to keep that in mind. It's still quite cheap money and you just got to brace for it and be prepared for it and have the right structure so that your home loan can wear it, can get through it.

Yeah, it's super important that you guys have been paying down your principal over the last one or two years in these low rate environments. And they're the lowest rates you'll ever see for the rest of your life. You never see them again. Our kids probably won't even see them again. It was like COVID pandemic, like absolute emergency buttons sort of level of rates. And so now inflation's running away, which means the cost of all your stuff is going up, your petrol's going up, your groceries are going up, everything's going up. And so they need to try and curb that. And the way to do that is they pull the interest rate lever. So then people feel poorer, they're not spending as much, thereby inflation starts to hopefully reduce and come back in line with their mark there. The other thing about fixed rates, you can only pay ten grand a year off a fixed rate. It's frozen, the money's frozen. You can't redraw in or out of a fixed rate. So if you did want to fix, I would recommend fixing only a portion of your loan. So that means you've got half variable, half fixed, or three quarters fixed, quarter variable, whatever that split is that you feel comfortable with. But yeah, from that perspective, the fixed rates were moving and the lowest they were in August. Now we're in a position where they're well above the standard variable rate and it's just not that sexy.

What are your thoughts on fixed rates in general?

Fixed rates in general are like for investment properties. If I've got an investment property, I want to make sure that my cash flow for that investment property is fixed and locked in for the next three years. So it doesn't matter what rates do. I know my interest only cost. My investment is say $600 per week. And so it doesn't matter if the Reserve bank or the banks put rates up. My cost base doesn't change. Now, this is an interesting point. It's not just the Reserve bank that's going to be putting rates up at the moment. They've just done it. They did it by 0.2. And then all the banks, how fast do they pass?

So fast rate reductions, not so much. They take their time. They sure do. But a rate rise, and they are straight on it.

So, yeah, the banks pass on to 0.25. What I see happening is the banks having a little bit of greed slip in a bit of a cash grab, which we know that they like to do, and they'll put an extra rate rise on top of the Reserve Bank. So let's say the Reserve bank goes by 0.4 next month, the banks will put an extra 0.1 on it. So they'll pass on 0.5. And so I foresee 1.5% of rate rises over the next 18 months. And so that for a lot of people, like, oh, that's a huge amount, but you've got to think. No, no, no, you just, you think that the rates you've been paying have been normal. They've been so low, the average interest rate in Australia over the history of interest rates is closer to 7%.

Yeah, I think it's actually put us all into like a little false sense of security, hasn't it? And it's a little bit scary because we have overstretched. Everybody has, you know, gotten more and more loans. I think people better remember, though, when your loan was originally serviced. So when you originally got your loan, the servicing calculator, they build in a buffer. So there's already 1 1/2 to 2% interest rate buffer built in at the very beginning. So banks, they know that there's going to be rate rises over time. They want to make sure you can afford it. So they've already accounted for that. So know that you can afford the loan. You're not going to have a problem. Especially, you know, especially clients on our money management program. Absolutely not. It's not even going to, it's not going to affect you, you're not going to notice it because you're smashing so much of your debt every month anyway.

Yeah, because our clients pay their debt on so quickly, their average monthly interest repayment reduces by $80 a month. Because as your debt gets lower, your interest gets lower. And so the rate rises are sort of offset because they're paying so much principal down, their actual interest costs are coming down anyway. So this sort of offsets it and it doesn't make too big a difference for our existing clients. And yeah, if you' on a money management program, you should not even be concerned about any rate rises because it's not about rates, about loan term. And the shortest loan term is the cheapest loan and you're all on the shortest loan terms.

Yes, absolutely. I think everybody on the money management program has seen the out of debt calculator and no doubt would have seen when we played around with the interest rate, we showed you 1%, 2% that it makes minimal difference to your out of debt date. It usually adds about 1 to 2 years or 1 year for every 1% that they rates increase. You're still way ahead of the curve. You're still 10 years better off, 15 years better off. So just keep focusing on the right number. It's the number of years I'm in debt, not the interest that I'm paying.

Yeah, everyone, we had a quote from a client. I'd love this quote. I'm just going to read it out because I just can't do it justice if I try and remember it. He said, Scott, it's not about how cheap the rate is, it's about how quickly you can achieve financial freedom. And that there is what this is all about. This is about financial freedom. It's about getting your income back in your hot little hand where it belongs. And the shortest term enables that. Whereas every single person out there in Australia is on a 30 year loan which has been designed by the banks to keep you in debt for as long as possible. And so these banks structure loans to keep you in debt. Surprise, surprise, every 3.9 years when you refinance to find a cheaper rate, they reset the loan term for 30 years. None of our clients are resetting their loan term. None of our clients are refinancing every 3.9 years for a cheaper rate because they know they're on the cheapest loan over the entirety of the course. And so from that, financial freedom is a game. Don't get distracted by the rate play. That's what the banks want you to do. And so every 3.9 years, reset the loan term and you go back to the start that 30 year marathon.

Yeah, good one. Nice work, Scott. Thank you so much. Great information. We'll see you again next week.

See you soon.