PERSONAL WEALTH IS FIXING RATE A
TAM AND CHRIS ASK: My wife and I sat down with a mortgage broker, who suggested we refinance to a fixed-rate loan.
The difference between fixed and variable is negligible – around 0.10 per cent on a three-year term (no offset, though) – but, with all the talk of the US Federal Reserve lifting rates, is the smart money fixing at these record low rates?
What would you do? BAREFOOT REPLIES: You’re right – interest rates are heading higher (not yet, but it will happen).
Well, that’s according to the bloke who actually sets our interest rates, Reserve Bank Governor Philip Lowe.
He made headlines last week when he said that not only will the next rate move be up, but Aussies will be “shocked” when it eventually happens.
Personally, I think the Guv is having his “seven-year itch” – given that’s how long it’s been since rates have increased in Australia.
Borrowers are basically behaving like a husband who’s spent his entire marriage drinking tinnies on the couch and waiting for the missus to deliver his dinner.
And then he’s totally shocked when she gets jack of it and tells him “it’s over”. “Where the hell did that come from?!” he says, bewildered.
Anyway, you guys are doing something very un-Australian: thinking ahead. Good on you.
However, I personally wouldn’t fix my rate, even on the slight differential that you spoke about.
Why? Because I don’t know when rates will increase, and neither does the Governor.
And because fixing your rate locks you in, and restricts the amount you can repay. (Also, in your case, there’s no offset account on the product you’re suggesting. Some fixed loans do offer this, but they charge more for it.)
It also restricts your ability to refinance during the fixed term, should interest rates or your circumstances change (and it also locks in the bro-
THIS week Mark Zuckerberg testified before the US Congress. It kind of looked like he’d entered an old people’s home, didn’t it? None of the old duffers seemed to have any idea how the internet worked.
Yet Zuck quickly clued them up, with his entire testimony basically amounting to, “If you’re not paying for the product, you are the product.”
Back here in Australia a similar situation was playing out, but in a different arena. The Banking Royal Commission is in full swing, and Justice Kenneth Hayne, the head of the Commission, was trying to get to the bottom of who mortgage brokers actually work for.
“So who does a broker act for, who does the customer think the broker acts for, who does the lender think the broker acts for?” he asked.
Well, turns out that 82 per cent of customers believe their broker is acting in their best interests, according to research from the brokers’ association, the MFAA (Mortgage and Finance Association of Australia).
However, the banks, who pay brokers to feed them loans, were a little more cagey in their answers. The NAB responded to the Commissioner like a moody teenager: “This is both a legal and a factual question, which — as posed at the current level of generality — is not capable of a simple answer.”
So there! The CBA didn’t even get a ker’s trailing commission).
So, unless things are really tight, I’d suggest putting your energy into getting the cheapest variable rate loan you can, and using the lowest rates in history to knock a huge chunk of debt off your home loan. NIKKI ASKS: I’m a lady who, at age 49, is contemplating marriage in the near future.
I earn $100,000 a year and am worth several million – my partner much, much less. I know marriage is not just about money, as we both chance to get its mumbo jumbo on. They got punked when the Commission found a previously secret submission from former chief Ian Narev, who admitted that the current mortgage broker model — which generates over half of all loans in the country — is ‘conflicted’, and as a result customers are losing out. Damn straight.
So let’s detail why your mortgage broker is conflicted.
First, they get paid by the lenders, some of whom pay higher commissions than others. Does that influence who the brokers recommend? Maybe. The Royal Commission found that the CBA’s wholly owned subsidiary Aussie Home Loans funnelled two out of every five mortgages to the bank.
Second, the more you borrow, the higher the upfront and trailing commissions paid to the broker. That’s one reason why ASIC found that customers who use mortgage brokers typically borrow more than those who apply direct, and it’s also why they found that loans arranged by brokers were 25 per cent more likely to go into arrears.
Zuckerberg, when faced with the overwhelming conflicts of his business, admitted to Congress that Facebook was considering implementing a userpays platform that would protect users.
It’s time mortgage brokers in Australia did the same. Remember, if you’re not paying for the product, you are the product.
Tread Your Own Path! have skills and qualities that make us a strong team. But isn’t it wise that I protect my assets with a financial agreement before marriage?
Thank you for your book – I have applied its advice, but maybe a future edition update could provide some guidance on this? BAREFOOT REPLIES: I went looking back through my book and couldn’t find anything in it about prenuptial agreements (or “binding financial agreements” as they’re also known).
Still, it’s true that I have said previously that I chose not to have a pre- nup with my wife. However, that’s because we came to the relationship relatively equal (financially), and knew we’d have a family.
So in our case there wasn’t a need for an agreement.
Even better, my wife is the smartest person I know, and there’s a direct correlation between our marriage and my increasing earnings!
In your situation, I agree that a binding financial agreement makes sense. You’re coming to the relationship with significant assets, and because of your age it’s unlikely you’ll be starting a family with the guy.
THE PRENUP DILEMMA