Join our investing community

Stuck with a high fixed mortgage rate?

Discussion in 'Real Estate' started by MSN, 23rd Mar, 2009.

  1. MSN

    MSN New Member

    Joined:
    23rd Mar, 2009
    Posts:
    3
    Location:
    Sydney, NSW
    I am and it's terrible. Me and my husband bought an apartment around a year and a half ago when interest rates were on the way up. Our mortgage agent pushed us to get our mortgage rates fixed being certain that the rates were only going to increase. Surprise surprise! Now we are stuck with a 8% fixed interest rate for the next 4 years and this is for 90% or so of our loan.

    Given the current mortgage rate we are paying around 1000$ extra per month and it's really really hurting us. More so because in this economy we don't have any job security!

    When we contacted our bank to find out how much we'd have to pay to get out of our mortgage contract we got a figure of around $50,000 which is more than what we paid as down payment on the apartment. Of course after buying and doing up the apartment we depleted pretty much all of our savings so we can in no way afford to pay $50,000 to get out of it. Even if we borrow money and pay it off will that really be worth it?

    Is anyone else in a similar situation and is there any way out of this?

    Cheers,
    MSN
     
  2. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW
    Hi MSN,

    Have you complained to the mortgage broker?
    Why did you go fixed? Did you want the certainty of knowing how much each month you pay?

    Cheers,

    Dan
     
  3. Chris C

    Chris C Well-Known Member

    Joined:
    2nd Apr, 2008
    Posts:
    1,327
    Location:
    Brisbane, QLD
    The only reassurance I can really give is that if you are "lucky" interest rates may actually start rising again in 12 - 24 months time once the RBA has cut rates to 0% and inflation looks to kick in at the end of this recession due to the large volume of monetary injections most central banks around the world are making in addition to the higher risk of default on both government and private loans, increasing lending institutions cost of capital given the higher risk premiums.

    On the flip side, you might be able to console yourself in the fact that 8% historically is not an astronomically high interest rate through out history. As long as you guys can keep your jobs you should be able to ride the worst of this out.

    Other than that I guess the best you can do is just save everywhere you can to build up a nice savings buffer to carry you through in the event the worst should happen.

    Best of luck.
     
  4. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    Interest rates will rise again before the time frame Chris is talking about.

    IMO things are not as bad as some people think they are and recovery will be a lot sooner which means forget much bigger rates cuts and more importantly forget the 0% interest rates.

    It'll never happen
     
  5. davo6253

    davo6253 Well-Known Member

    Joined:
    11th Jul, 2008
    Posts:
    74
    Location:
    Melbourne, Victoria
    For the more immediate term you should be able to make extra repayment on the fixed loan up to $10,000 a year for no fees, so i would be putting any extra cash toward that, or if that 10% that isnt fixed is a LOC use that to pay 10k as it will reduce your interest bill!

    Cheers,
    David
     
  6. Chris C

    Chris C Well-Known Member

    Joined:
    2nd Apr, 2008
    Posts:
    1,327
    Location:
    Brisbane, QLD
    If the cash rate is raised by the RBA before the next 12 months it will more than likely be a result of containing massive inflation; not because the economy is better.

    You seem to post a lot of "unsupported opinions" on these forums... got any facts or even sound theories as to why these theories will eventuate.

    How many countries were saying that 6 months ago... US? England? Japan? Soon the entirety of Europe... In this climate you should be careful when you say "never"...
     
  7. dudek

    dudek Well-Known Member

    Joined:
    10th Sep, 2008
    Posts:
    199
    Location:
    Sydney
    Chris, you are shooting blanks each time. Your educated guess is as good as anyone's.

    Back to the topic.....So, lets say you pay 50k penalty to the bank. Are you in title to claim it as lose and negatively gear it for financial year 08/09? If so you will loose only about 30% after all returns etc… I am not sure about it so anyone with some brains please advise. You may even gain by loosing. After all that extra $1000 makes 12000 p/y and comes after tax . Also, you may be gambling a bit as rates may finally catch up with you sooner that you can recover your losses. However, according to some doom&gloom doctors on this forum we may be in very big and prolong recession and rates may stay low for some time :eek:
     
  8. Chris C

    Chris C Well-Known Member

    Joined:
    2nd Apr, 2008
    Posts:
    1,327
    Location:
    Brisbane, QLD
    Ugh... in life we are unfortunately not all created equal and we do not all have equal experience and knowledge.

    I'm not saying anyone's knowledge is prefect, but I will adamantly argue the point that an "educated guess" is far more likely to eventuate than just a "guess". This leaves the major variable being "how educated" is the person "guessing". In my opinion these forum have quite a spectrum of individuals ranging from the VERY educated and informed to those that are very misinformed "average joe", "part time mum and dad investors".

    That said when it comes to economic analysis and predictions I think the vast majority of the forum (including myself) are WELL short of what I'd consider to be "informed" though there are definitely vastly varying degrees of people's lack of understanding...

    Just because we are in recession doesn't mean rates have to be low. Some recession have had very high interest rates indeed... the most recent two, the early 90s and early 80s, which had interest rates of around 10% and 12% respectively.

    It is also interesting to note that the interest rates on both those occasion bounced back to levels above what they were 12 months prior to their bottoms. If that trend continues (which I expect it will) I expect that within a year or two of the end of this recession we may well have interest rates back over 10%. Though this time around I'm expecting that the RBA cash rate will be dropped below 1% (I'm unsure if the RBA will drop it to 0 given that it is clear that ZIRP isn't really working elsewhere) and interest rates will actually start rising again before the end of the recession which is generally unusual, but this will be due to natural market forces rather than the manipulation of governments and central banks.

    [​IMG]

    Anyway I don't want to have to waste too much of my time defending myself against name calling (I'm not a doom and gloom merchant) when all my analysis is based on pretty sound economics and history (as in I'm just being realistic). At the end of the day it's not my loss if people want to use "hope" as their wealth preservation strategy and "guessing" as the basis for their investment selection.


    I agree back on topic.

    I don't know if it is any consolation but rest assured you are not alone. There are a HUGE number of Australians who are in exactly the same position. I often chat with my best mate about unfortunate timing of when his fixed his rates. According to this article there are over 40,000 Australians like him and your yourself who are in a similar situation...

    Fixed-rate trap snares 43,000 home owners - National - smh.com.au

    I personally don't think refinancing is a wise move unless cash flow becomes a REAL issue, because I don't think it is reasonable to expect that rates will stay this low for the duration of the four years you have left on your fixed term. Plus, as I have already mentioned there is probably even quite a reasonable case to expect very high levels of inflation to start moving through the economy in the not too distant future and we may well see interest rates move towards the levels they were back in the 80s (if not higher).

    Can I ask if you have enquired with the bank about whether there is a difference in the exit fees if you are selling the house as opposed to refinancing (I don't expect there is, but might be worth asking)?

    Also in addition to this I don't think you should be too worried about interest rates falling too much further, given that even with the US Fed funds rate at 0% people in the US are still paying 4.5 - 5% for their mortgages. I'm not saying the US and Australia operate under a perfectly similar system, but I'd be confident in the fact that even if the RBA did drop rates to 0% tomorrow none of the Australian banks would, nor could they, drop their variable rates by an equivalent amount.

    I guess the core point of what I'm trying to say is don't get disheartened, you may be in a tight spot right now, but just knuckle down, work hard and try to weather the storm, fixing your rates may well yet come back to be a blessing in disguise down the road. Who knows...

    ;)
     

    Attached Files:

    Last edited by a moderator: 25th Mar, 2009
  9. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    This is one of the reasons they didn't lower them this month


    mate, you are using are strong words there....:eek:
    The fact is that my theories are no worse than yours who thinks that the sky is about to fall in.

    Just get away from that computer and go and have a look in the shops.
    Then you'll realise that the end is nowhere to be seen.

    Think about the times we live in.
    We are all used to having a certain lifestyle and despite what the blind media are telling us we can control our spending for a certain period of time but we won't be doing it forever.

    Interest rates have been coming down a lot, and our spending capacity has increased. At the same time KRudd is giving us money to go out and spend.
    So what is this telling you?
    That we'll all batten down the hutches?
    I don't think so....
    People will soon be saying: I am tired of not going out to my favourite restaurant.
    I also want that overseas holiday, I haven't had since 2004.

    We are resources nation but things will turn around.
    China had a slowdown in production because of worldwide fear and not because of worldwide recession or depression.

    IMO things will change and will change fast.
    Fear will go away as soon as the share markets start recovering.
    And the recovery will be fast, people will get more condident and will come out of their caves and start spending again, and things will get back to normal.

    I know you are a bit young to understand but people very rarely will accept a downgrade of their lifestyle.
    We live in the 21st century.
    Things have to improve because of the lifestyle we all want to have.
    You can start riding a donkey to work if you like, but I and the majority of other people will still drive our cars as we are used to do and will still go out and enjoy dinner just like we did last week and the week before that.
     
  10. dudek

    dudek Well-Known Member

    Joined:
    10th Sep, 2008
    Posts:
    199
    Location:
    Sydney
    I think we are getting off the topic here. Fact is that MSN is in distress and is looking for some word of advice. IMO they need to improve cash flow as this looks like the main problem. If things don’t improve soon they may loose IP and end up paying 50K anyway. IMO refinancing will be the best option. In case they terminate contract they get hit with penalties but retain IP. Other thing will be to increase cash flow by borrowing additional 50K from other lender. Stay away from mortgage brokers, go and talk directly to one of the four major banks. Not on the phone but in person. Bank managers are approachable and will listen to you and try to help you. Dedicate new loan to manage repayments. This could push you across the line until next tax return etc… put the ATO check back to 50K loan and try to move on till the next tax return. There are few options and borrowing more may not be as bad as it sounds. Loosing IP and additional 50K is defiantly worst that gambling on future capital gains.
     
  11. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    Good point.


    MSN

    The exit fees are very high so IMO you should stay put.

    What's the standard variable loan now 6.5%? so it will probably drop to 5.5%
    and it will start coming back up again.

    Ok the higher repayments hurt a lot but so will the exit fees
    Higher repayments are not the end of the world, try to find ways to live with them.

    Other factors which should be considered would be
    The long term plans for this property (are you keeping it?
    The type and location of the property, (will it go up in value?)
    If it's an investment property or not (are you sharing your pain with the ATO?),
    Are you willing to rent it out for a while during the period the repayments are high.
     
  12. Chris C

    Chris C Well-Known Member

    Joined:
    2nd Apr, 2008
    Posts:
    1,327
    Location:
    Brisbane, QLD
    Right... inflation is the reason they didn't drop rates... LMAO!

    The world INCLUDING AUSTRALIA is suffering from a massive slowdown in inflation, many developed countries are approaching if not are already in deflation. Right now the RBA could care less about inflation which is why they dropped rates by an unprecedented 400 basis points whilst we still technically had inflation well above the upper band of 3%.

    I think a bigger reason the RBA didn't drop rates is because in reality if dropping them 400 basis points doesn't do anything to stop us going into recession dropping them another 50 basis points wouldn't have made a difference, especially if the banks couldn't afford to pass them on anyway. They are just playing a wait and see approach before they probably resort to alternatives to the tradtional forms of monetary policy to stimulate the economy.


    I never imply the sky is going to fall in, there were loads of deepish recessions last century, this one will just be bigger (with the likely exception of the Great Depression). Just because I say that doesn't mean I think the sky is falling in...

    I will however concede that sometimes I imply that I don't know what the future will look like, and when I say that I imply that it will be "bad", but that is not to say that I'm scare by my own predictions or anything. It's just seems that too many Australians have forgotten what a real good quality recession looks like because you have to go back to the early 80s to see one. So when someone like myself thinks are going to get "bad" people instantly snap back, stop being a doomer and gloomer, I mean how bad could things get, when the reality is they can get worse than anyone has seen... so I think I'm quite justified in saying this will be "bad".

    :D

    I'm not implying we are reaching "the end" of anything. Though I do think we are at a turning point about how we go about things. In a way you could call that "an end" but it won't be "the end" in a dramatic sense.

    Anyway if I was you I'd stop telling me to go look at the shops, and I'd recommend you take your blinkers off and have a look at the rest of the world, and then get an education on how the world is structured (as in that it is globalised) and realise that what's going on overseas is coming to a shopping mall near you.

    :p

    If that doesn't register maybe you can look at the Australia stock market which is down by about 50% and realise that the stock market is FORWARD LOOKING and that it is just a matter of time before things worsen here.

    The most important thing in all of my comments is that I'm not being doomish and gloomish because I'm scared - I'm doing it to forewarn others, including you! Being prepared and making the right decisions is the only thing that will bring us out the other side quicker and better for it.


    Do the maths, on Australian finances... both on individual households and as a country. We've overspent; we have a lot of debt to repay back (which is exactly what this thread is about). Know that both individuals and Australia has dug itself a hole and that at some point we need to start digging ourselves out of it... I'm not saying it's impossible - I'm just saying it's going to take some hard work and those will be some tough times.

    Remember while you argue that too many Australians are way used to the "good life" for us to ever go back to working hard, I respond with this simple principle that I promise will hold true:

    You can't borrow your way out of debt; you can't print your way to prosperity; and you can't spend your way to wealth.

    When the penny drops for you, you will realise just how crazy we've all been...

    It's telling me that the Australian economy is so boned that central banks and governments are literally throwing money at us to try reinflate the bubble. What's it telling you?

    ;)

    I don't know if you have looked into the results of these "stimulus" packages and their effectiveness (I expect you haven't otherwise you would realise they aren't going to save anything), but the reality is of the cash handouts given last year figures suggest that 8% of the money was spent, and if you know anything about economics then you will know that the principle of the cash handouts is to try and stimulate a multiplier effect through the economy, but when you have only 8% being spent and with as many leakages in an economy as Australia has it means the cash handouts aren't stimulatory because you can't even get a multiplier of 0.2 let alone above 1 meaning that at this stage the handouts are just resulting in debt burden that future tax payers will need to pay.

    The much more likely reality is that people will soon be saying, I'm working extra hard because my business is laying off workers and I don't want to be next, but just in case I am I'm saving ever penny I can because I have massive amounts of debt and my job security along with my alternative job prospects is diminishing every day.

    Last night at soccer training, my best mate told me that he was so confident about the economy he took a second job (please not my sarcasm). His firm has already sacked 10% of its workers and moved all the employees onto 9 day fortnights to save money. He thinks it's just a matter of months before the firm will collapse. I'd also like to point out that if he can't get a job it's a dire prognosis for the rest of us because he is probably the hardest working and smartest guys I know, and I like to think that is saying something...

    So whilst there will be some sectors of the economy that will be resilient you can rest assured the majority of people will be tightening the belt, and as things get worse you can expect that there will be even less and less exuberance when it comes to spending.

    I don't think you understand much about China or what the fear encompassing the world is based on?

    And I don't think you understand what is really required to bring confidence back to the markets and world...

    Once again I don't think you have really thought it through. Most Americans have now been riding out a 16 months recession, with it being very unlikely to end until 2010 making it the longest recession since the Great Depression, with over 500,000 americans losing there jobs every month.

    I promise you the millions of Americans that have lost their jobs won't just pick themselves back up and shake it off, I promise you the millions of Americans that have lost their homes and are bankrupt won't just go back to normal spending, I promise you the millions of retirees retiring every year but have lost over half of their 401k and stock portfolios won't be spending like they will never have to work again.

    At the end of the all this most of the developed world will have gone through much of the same thing and we will not just be getting back to business as usual. This recession will cause a social shift in how we go about what we do, it will change economies as we know them, it will change how economies are run, and how people operate in them...

    I know you are too old and stuck in your understanding that has been based on only your experience to understand that people's lifestyles aren't sustainable, and people WILL accept a downgrade in lifestyle as opposed to the alternative (bankruptcy).

    The vast majority of people, I'd say around 97%, have little to no real say in what their lifestyle will be like anyway. They are just products of the system, and the system we have been operating is very flawed...

    Mate I don't drive to work, I work from home for myself. I earn more than 90% of Australia yet still spend less than 90%.

    More importantly, you won't be driving your cars to work when the price of oil is 5 times what it is today. I don't think you really understand the economics of how in 5 years time the price of oil could realistically be 5 times what it is today, but I promise you when that happens the majority WILL stop driving themselves to work.

    Once again this comes back to my point that the vast majority of the population is not really in control of their lifestyle, they just think they are. They might be able to influence it, but they don't control it...
     
  13. dudek

    dudek Well-Known Member

    Joined:
    10th Sep, 2008
    Posts:
    199
    Location:
    Sydney
    Chris, this is not a topic about yourself or how well you know economics. This is topic about someone who joined forums to get some advice. Have you ever help anyone in your short life instead of annoying living thing out of people?
     
  14. Chris C

    Chris C Well-Known Member

    Joined:
    2nd Apr, 2008
    Posts:
    1,327
    Location:
    Brisbane, QLD
    It would actually be good if she came back so we could get some more information about her situation from her.

    I got the impression that this place wasn't an IP and that it was a PPOR, but I don't think MSN distinguished which in her orignal post.

    In the event that it is a PPOR it'd be very interesting to hear if turning it into an IP and moving into something smaller within the rental market or moving back home would be an option, because this could potentially help a lot with the cashflow problem, and getting tenants in the current market probably wouldn't be all that hard.

    I tend to disagree (assuming that the place is a PPOR) and feel she might be better served trying to grind her way through this given that 50K is a lot and there is potential for interest rates to go the other way over the next 4 years.

    Ultimately I feel this isn't just a case of poor loan selection, there is obviously an element of over extending oneself, and as such I think potentially looking at moving out to generate cashflow from the property has the potential to help with the problem and they'll just have to accept that they need another two or three years of saving and working hard to pay down their loan before they are finacnial stable enough to justify living out of home and handling such a large loan.
     
    Last edited by a moderator: 25th Mar, 2009
  15. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    Mate you've got this point wrong just like the other ones you've discussed earlier.

    The price of petrol isn't sustainable at such high levels.
    We actually had peak oil just recently haven't you noticed?
    and you know what that did to the oil companies?

    They lost market share, People are switching to smaller cars and hybrids
    It speeded up the development of electric cars
    It made people think of alternative fuels and ethanol

    Ethanol is a real alternative to petrol and can be implemented cheaply and in a short period of time.
    Australia is ideal for ethanol corn plantations and we could easily go down the path that Brazil did and be self sufficient running our vehicles on ethanol.

    Petrol price at 5 times the current one?
    You've got to be kidding, are oil wells about to run dry?

    Wait and see what will happen to petrol prices when China starts mass producing electric vehicles, and it's on the cards, the only thing that stops production atm is the large size of batteries needed, but battery development is progressing fast, you will see new and smaller fuel cells appear on the market real soon.

    For new cars, electric is the way to go and us oldies with our V6's and 4WD's we'll be happily running our cars burning the ethanol we produce from the corn fields of NSW.
     
  16. try anything once

    try anything once Well-Known Member

    Joined:
    8th Oct, 2008
    Posts:
    117
    Location:
    melb
    Returning to the subject, what can be done...

    My brother in law is in a similar position with a loan from CBA. If you do the maths, in most cases the banks are quoting figures way above what the number should theoretically be. For example, if you took a 5 year loan locked at 8%, and two years later decided that you wanted to break out of it and go valiable, the bank would historically look at the remaining term (3years) and compare it to your rate, and apply the difference for the remaining term. Currently CBA 3 year rate is 5.75% so the difference (2.25%) over 3 years, (6.75%) is roughly what would need to be paid as a breakout fee.

    Given the 50K example above, this would imply a loan balance of around $740k. I suspect that the loan balance in question is no where near this high??

    What I was told by CBA is that in the current environment, they are not using the retail 3 year fixed rate as the reference rate for calculating the breakout figure. The reason giving is that the bank is contractually obliged to use a rate they can resonably achieve in the market place for re loaning the money for a similar term, and in todays market no retail customers are locking in their loans for 3 years. So the bank instead uses an interbank rate which is 2-3% lower than the retail 3 year fixed rate (ie just 2-3%). So now the differential with the original loan has more than doubled - hence the high break out figure.

    Given the number of people in this situation, I am surprised that the media has not picked up on this. I think that unless the bank can demonstrate they are not writing any new 3 year fixed loans they should have to use their published retail rate as a reference point.
     
  17. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    TAO

    Good point there, hopefully the media will pickup on this and will put some pressure on the banks to use reasonable means in calculating the exit fees.

    One would expect the government to be watching bank behaviour but they are absent on this issue just like they are absent on the petrol price issue...:eek:
     
  18. MSN

    MSN New Member

    Joined:
    23rd Mar, 2009
    Posts:
    3
    Location:
    Sydney, NSW
    Thanks everyone,

    I'm overwhelmed by the responses and people trying to help. We've decided not to break our loan because we simply do not have the money to do that. As someone rightly pointed out - we're just going to try and save as much as we can and hope we don't lose our jobs. That should help us survive these bad times (fingers crossed).

    As there were so many of you who responded, I don't remember your usernames so I'l ljust answer the questions raised:
    - We are currently living in this apartment and plan to keep it long term
    - Future prospects of the value of the property look promising so hopefully the price will go up in the future
    - Our mortgage agent encouraged us to fix our rate because rates at that time were rising.
    - Our loan balance is no where near 740$K you are absolutely correct. It is in fact less than 500K
    - Yes we'll try and make payments in excess of our mortgage monthly payment

    I really hope the media picks up on the number of people like me who fixed their mortgage rates when they were high and are now suffering. I was thinking of writing to journalists covering this subject to bring it to their attention. Any numbers I can provide them with will be extremely helpful. Does anyone know where I can find reliable stats on this? Also any suggestions on relevant journos are most welcome.

    Cheers,
    MSN
     
  19. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW
    Hi MSN,

    There is about 34,000 people in fixed loans between the highest point and when the rates started dropping. I'd start with the mortgage broker giving bad advice, remember past performance is no guarantee of the future. This is the same with interest rates going up and down...Your mortgage broker should have advised you of the effect of locking your rate, ie, if rates go down, a fixed rate loan does not (If they did not, you have a reasonable basis to make a complaint). Hence you are paying more than you would otherwise. Though aren't you happy with the certainty? You were when the rates were going up weren't you? Or are you more worried at the moment about being able to make the repayments (job security)?

    Cheers,

    Dan
     
  20. MSN

    MSN New Member

    Joined:
    23rd Mar, 2009
    Posts:
    3
    Location:
    Sydney, NSW
    Hi Dan,

    Yes, I'm worried about making repayments in an environment which provides no job security.

    And you are right - we were very happy with our decision of fixing the rate when the rates were going up albeit for a short time before they came crashing down. I know we just need to suck it up and live with our bad decision but I'm just trying to be proactive here and see if there's anyway out of this mess, I guess not.

    Thanks,
    MSN