Fixed rates are good for banks, but maybe not for customers
Great article from Duncan Hughes at the AFR which discusses why banks want to lock customers into with fixed rates. However, what the AFR’s story stops short of saying are the following key points all consumers should know. I will also disclose up front that I'm generally not a fan of fixed rates.
There are often better variable rates available with the right knowledge and negotiation.
Fixed rate loans are one of the banks most profitable products because the rate is generally higher than the variable rate.
Two to five years is a long time in anyone's life and a lot can change. New house, new job, change in relationships, etc. Many customers believe that they’re saving money when they lock in a fixed rate. However, they may be hit with very hefty break fees and penalties (in the thousands), when they need to break their loan during the fixed rate period as a result of one of these life changes.
Avoiding risk and possible interest rate increases is the sales pitch, but really the main aim of fixed rates is to lock customers in so that they can’t switch!
Nearly all customers we see that have had fixed rates wish they hadn't because they’ve either paid a premium for the fixed rate, or they have incurred a break cost to get out of the fixed rate contract.
I recently attended a Bank economics session that predicted rates would continue to fall by possibly another 0.50% in the short term. Immediately afterwards they recommended customers attending should consider locking in rates now. Umm...?
The simple fact is that rarely do fixed rates present better value than what can be negotiated with variable rates, because any fixed rate you're offered has margin built in to hedge the banks future risk. The irony here is that customers wanting to avoid risk by using a fixed rate, may actually be placing themselves into a more risky position and open to higher costs later on.
Check out the AFR article here: http://bit.ly/29HuqpU
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