If you have a variable rate home loan in Australia, then there is a good chance that your interest rate will increase before the end of November. Several banks have announced that they will increase their variable mortgage rates.  They are giving their customers a rate hike at a time when the Reserve Bank of Australia has left the official cash rate on hold at 2.00%

The increase will affect all residential mortgages.  For those with  investment properties this rate hike will be in addition to the changes to investment lending we saw in July.    Getting a home loan has become more difficult. Unfortunately, we suspect this is not the last change we see for the Australian mortgage industry.

The size and timing of the bank initiated rate hike, will depend upon which lender you have your mortgage with.  If you have a variable rate mortgage with one of the 8 banks we researched, then the table below will show the size and timing of your rate increase. We have also estimated how much additional interest your mortgage will cost you per year.

The banks are uniformly stating that the rate hike is necessary because 'lending will become less profitable' under the new regulations.  It's a move to protect profit growth and keep the shareholders happy.  Home owners will have their monthly mortgage payments increased so that the bank can keep their profits and share prices growing.

The APRA capital adequacy changes are only relevant to the banks which use the internal ratings-based (IRB) system of credit risk.  There are only five lenders in Australia using this system, they are: ANZ, Commonwealth, NAB, Westpac, and Macquarie.  As a further measure to protect their profits, these five banks have been cutting jobs.  Between the five lenders there have been almost 1,500 jobs lost over the last 6 months.

As customers, with monthly mortgage payments, it is insulting that the bank would take extra money from us purely to keep the shareholders happy, but it could be worse!  At least they didn't take away our income.  That was saved for their own staff members.  As with any company, banks are in business to make money.  It just seems unfair when money and jobs are being taken from every day working people in order to maintain corporate growth figures.

The top decision makers within the banks (who earn the highest wages), will always focus on the shareholders.  After all, it's the shareholders who have the power to vote them out of a job if they don't perform well.   There is also the fact that their annual salaries usually include shares or options in the company.  This means their personal wealth is directly linked to the share price.   This is common with many large companies, and as someone who has invested in shares, I'm not entirely against it.  Companies often act in ways which are detrimental to their staff and customers in order to protect profits.  The difference with banks, is that their customers are the millions of Australians who are working hard to pay off their home loans.  

The new capital adequacy ratios will make lending less profitable, and we understand there was a need to react.  Were the banks correct to pass on this cost to their staff and customers?  Could they have taken a more altruistic approach?  Do you think share holders would be outraged if a bank announced 'profit growth will not meet expectations because we want to keep Australian mortgage payments low, and avoid cutting jobs'

What are your thoughts, we'd love to hear from you in the comments section below!

ANZ and NAB will increase their standard variable rates.  They join Westpac and Commonwealth Bank, who have made similar announcements in the past week.  ANZ will lift their variable rate by 0.18% and NAB will lift theirs by 0.17%.  The rate hike will hit ANZ customers on November 20th, and NAB customers on November 12th

All four banks are saying that they need to increase their variable rates, at a time when the RBA rate is on hold, because of the regulatory changes announced by APRA in July.  From July 2016, banks using the Internal Ratings Based (IRB) system for credit risk management, will have to increase their capital adequacy requirements.  Only the Big Four and Macquarie Bank use the IRB system in Australia. This rate hike by the big four is addition to the changes in investment lending, which swept through the mortgage market in August.  

If you have a variable mortgage with one of the big four, then your interest rates will go up by the end of November.  How much more interest you are charged on your home loan, depends on the size of your mortgage, and which lender you are with.  The table below outlines how much the increase will cost per year:

For every $100,000 you owe on your home loan, you will pay between $150 and $200 per year in extra interest, unless you refinance your mortgage to either a new lender or a fixed rate. There are better deals available but there is no guarantee that other lenders will not increase their variable rates in the future.

Many in the market believe that the rate hike by the big four, clears the way for the RBA to cut the official cash rate for a third time.  This would drop the official rate below it's current historic low of 2.0%.  The increased expectation of a rate cut has caused the Australian Dollar to fall in recent days, as shown below:

We expect that getting a home loan in Australia will continue to get more difficult.  APRA, ASIC and the RBA have joined forces to become the 'Council of Financial Regulators'. Together,  they want to reduce the risks they see in the Australian home loan market. They have stated that they want to address:

• Higher risk mortgage lending - Which includes high loan to value ratio loans, interest only loans, and high loan to income mortgages.

• Growth in investment mortgages - APRA wants to limit growth of investment mortgages to 10% per annum.  A growth rate above 10% would increase the risk factor 

• Loan affordability tests - When banks assess how much new borrowers can afford, APRA wants them to use a minimum buffer of either 7% or 2% above the rate of the mortgage they are applying for.  This means if you are applying for a new home loan with a rate of 4.5%, the bank will test your ability to make repayments at 7%

What Do You Think?
We'd love to hear from you in the comments section below.  Do you think the RBA will cut the cash rate again?  What changes do you think are next for the mortgage market?

The Commonwealth Bank will increase variable home loan rates by 0.15%.  The move which was announced today, will take effect on November 20th.  CBA is the second major Australian bank to increase their standard variable rates.  Last week, Westpac Announced that they will increase their variable rate by 0.20%.  It is expected that ANZ and NAB will also lift their standard variable rates.

Like Westpac, Commonwealth is says the rate hike is a reaction to the regulatory changes announced by APRA in July.  From July 2016, banks using the Internal Ratings Based (IRB) system for credit risk management, will have to increase their capital adequacy requirements. Several banks including Westpac and Commonwealth, have already changed how they treat investment mortgages.   

The increased capital requirement will make lending less profitable.  The banks will have to hold more cash on deposit for every dollar loaned out.  CBA is protecting their profitability at the expense of their home loan customers.  After all falling profits will hurt the share price. It's a balancing act between looking after customers and looking after share holders. 

After Westpac announced their rate increase, shareholders showed their approval by pushing the share price of WBC up by 4%.  It will interesting to see how shares in CBA react to today's announcement that they will follow suit.

What Does This Mean for Borrowers?

If you have a variable rate home loan with one of the major banks, there is a good chance that you will feel a rate rise before the end of 2015.  How much the rates go up will depend on which bank you are with, and their internal strategy.

There is some silver lining in this situation!  Some economists believe that if the banks lift their variable rates, then the Reserve Bank will but the official cash rate and take it a new record low, below the current  2.0%.  This will help cancel out the increase in standard variable rates, if the banks pass on the cut.  As we have seen, banks don't always pass on rate cuts.

If you have a variable rate mortgage with a major bank, then now is a good time to shop around for better deals.  You might consider fixing a portion of your home loan, or refinancing to an alternate lender, who does not use the IRB system, and might not deliver their own rate rise.

Westpac will increase all variable home loan rates by 0.20%. The move announced today, will take effect on November 20th.  It is not known whether or not other banks will follow suit, but so far none of them have stated that the will not.  

Westpac has said that their recent capital raising, and this rate hike are in reaction to the recent regulatory changes.  On July 20th, APRA increased the capital adequacy requirements for residential mortgage providers which use the Internal ratings-based (IRB) system of credit risk. Several banks, including Westpac reacted to this announcement in August, and made changes to their residential investment lending policies.

A higher capital requirement, means that lending becomes less profitable.  Falling profits make shareholders unhappy.  Westpac is protecting shareholders at the expense of their home loan customers.  They may be the first bank to make such a move, but we doubt they will be the only one.  CBA, NAB, ANZ and Macquarie also use the IRB system, and we expect they too will soon make moves to keep their own shareholders happy. 

We expect the Australian mortgage market will continue to change over the coming months.  Unfortunately for borrowers, we don't think lending will be getting any easier or any cheaper.   Relief might come if the RBA decides to cut the official cash rate for a third time.  However as we know, banks don't always pass on rate the full rate cut.

How Will Borrowers React?

Westpac is the first lender to announce an increase in variable rates.  The change will only be effective in 6 weeks.  This gives their customers some advanced warning, and time to react.  Many will be tempted to refinance to other banks.  The risk in refinancing, is that the bank you move to, might also increase their rates.  Maybe it's a good time for customers to lock in all or part of their mortgage with a good fixed rate.  The advantage of a fixed rate is that the banks can not alter the rate during the fixed period. 

For most Australians, a home loan is the biggest financial commitment we will ever make.  It's a credit contract that can last more than 30 years.  Most of us have a pretty good idea what interest rate the bank is charging on our mortgage.   We wanted to have a streetonomic look at home loan interest, to explain how it is calculated.

In Australia, interest on home loans is quoted as an annual rate, then calculated daily, and charged monthly.  The amount you are charged each month depends on your annual interest rate, your daily loan balance and the number of days in the month.  Your loan will accrue interest every day.   The daily interest accrued is calculated by multiplying your balance by the interest rate, then dividing this by 365.  Once a month you are charged interest based on the total of all the daily calculations for that month. 

Imagine Mr. Borrower, owes $300,000 on his mortgage and his interest rate is 4.50%.  Every day he would accrue interest of around $36.99.  If he decides to only make interest only payments, then the interest he would be charged would vary slightly from month to month, depending on how many days are in that month.  This is illustrated in the table below:

As we can see, even though the loan balance remains constant at $300,000, his interest charged varies depending on how many days are in the month.  Mr. Borrower accrues interest of $36.99 per day on his mortgage.  At the end of each month the total of the accrued interest is charged as his monthly interest.

What if Mr. Borrower Made Principal and Interest Payments?

If Mr. Borrower decided to pay off his home loan in 30 years, then his monthly payment would be $1,520 (at an interest rate of 4.50%).  His payment can remain constant, but the amount of principal and interest charged each month will vary, as shown below:

Mr. Borrower is makes the same monthly payment to his mortgage.  Each month the interest he is charged, and the principal he repays differs slightly.  This is due to both the number of days in the month and the home loan balance changing from month to month.    When Mr. Borrower first took out his mortgage in February, he was accruing interest at a rate of $36.99 per day.    In April his mortgage was accruing interest at $36.88 per day. 

The interest rate has remained constant at 4.50%, but the daily interest charged has reduced by 11 cents.   This is because  Mr. Borrower has reduced his home loan balance by $860, to $299,140.  Each month part of his mortgage payment will go toward reducing the principal amount owed.  In May his loan will accrue interest at a rate of $36.82 per day.

 This pattern will continue for the life of the mortgage.  Each payment will reduce the rate at which interest is accrued.  This in turn means that each payment pays off a little more principal.  Over time this will accelerate and the home loan will reduce at an increasing rate.  This is due to the effect of compound interest.  The chart below shows how much principal Mr. Borrower would repay in each year of his mortgage:

As we can see, in the first year of his mortgage, Mr. Borrower reduces his debt by less than $5,000.  By year 30, he will reduce his loan by almost $18,000.  This illustrates the effect of compound interest on loan repayments.  If Mr.Borrower wanted to accelerate his repayments even further, then he might consider making extra mortgage repayments.  Making extra repayments will reduce your loan balance, and save you interest for the remaining life of your mortgage.

What if Mr. Borrower made weekly payments?

If Mr. Borrower decided to pay 1/4 of his monthly payment every week, then he'd have a weekly payment of $380.  The cash flows of making weekly payments over the same 3 months is shown below:

In both the monthly and weekly scenario Mr Borrower has made total repayments of $4,560.  On May 1st his mortgage balance will be $298,719 if he makes weekly repayments, and $298,727 if he made monthly payments.  Using weekly repayments, Mr. Borrower has reduced his principal by an extra $8.  This is because each weekly payment reduces his loan balance, and in turn reduces the daily rate at which his mortgage accrues interest.  The benefit comes from making early repayments, rather than waiting till the end of the month.

Credit cards are a major cause of financial stress.  Accumulating a credit card debt is as easy as spending today and worrying about it later.  When we want to buy something, we forget about the high interest rates, and our existing balances, instead we see an available limit.  It's no surprise so many of us lose control and find ourselves struggling to manage our credit cards.

Getting your credit cards under control will improve your finances, reduce your stress, and put you on a path to a better future (financially).  Here are our 6 strategies to help you get rid of your credit card debt.

• Get to Know Your Credit Cards
• Don't Use More Than One Credit Card
• Pay Down the Most Expensive Card First
• Set a Target Credit Limit
• Switch Your Credit Card to a Cheaper Option
• Consolidate Your Credit Cards

Get to Know Your Credit Cards

It's important to know how your credit card works, specially if you have more than one.  You can get all the information you need either from your monthly statement or online banking. For every card that you should keep track of:

• Your Credit Limit - anks often offer us automatic credit increases, and we can lose track of our current limits.  It's important to know your limits.
• How Much You Owe -  Are you close to your limit, or do you have some funds still available?  Be careful not to go over your limit, or your purchase might get declined, or even worse, you'll get some nasty over limit fees
• Your Interest Rate - In Australia, we've seen credit cards with interest rates ranging all the way from 9% to over 30%.  Make sure that you know how much interest each card is charging you
• Your Minimum Payment - If you pay less than this amount each month, you will incur  nasty fees.
• Your Payment Due Date - If you don't make your minimum payment before this day, you will incur more nasty fees.
• Your Ongoing Fees - Does your credit card charge an annual or monthly servicing fee?  How much is this?

Don't Use More Than One Credit Card

If you have more than one credit card, then decide which one you would like to use actively.  Take the other cards out of your wallet, hide them somewhere safe, and focus on paying them off.  We suggest using the card with the lowest interest rate and no ongoing fees.

This will help you keep track of your spending better, you can send a monthly spending allowance to your active card, and send debt repayment amounts to your inactive ones.  Having the more expensive cards out of your wallet will reduce the temptation to use them impulsively, but they will still be there in case of an emergency.

Pay Down the Most Expensive Card First

After you've sent your monthly allowance to your active card, make the minimum payment on all your other cards, then pay the remainder into the card with the highest interest rate. The higher the interest rate, the more you save when you repay the debt.

Once you have paid down the most expensive card, move onto the next most expensive until you have paid them all down.  Repaying your cards in this way will ensure that you minimize the total interest your are charged while you repay your credit cards.

Set a Target Credit Limit

One of the biggest problems with credit cards, is that they are so easy to use.  Spending up to and even beyond our credit limit is as simple as waving a piece of plastic.   The best way to manage this temptation, is to set a realistic and manageable target limit on your credit cards.     Your goal might be to have a credit card limit of $5,000 once the debt is under control.

If you currently have a total limit across all your cards of $15,000, and you want to get it down to $5,000, then we want you to gradually reduce your credit limit.  If you pay your debt down by $1,000, then reduce your limit by $1,000.  Keep doing this until it hits zero, and you close the card. Don't wait until the card is fully paid off, otherwise there will be the temptation to spend that money.

If you need to have access to funds in your credit cards for emergency purposes, then set an emergency buffer.  For example, if you need a buffer of $4,000, then every time you have $5,000 available, reduce your limit by $1,000.  Banks will allow you to reduce your limit in this way, and some of them will even let you do this through online banking.  

It should go without saying, but if you want to get out of credit card debt, then never accept a limit increase offer. If you are near your limit, but have not gone over and have not had late payments, then banks will sometimes send you an automatic limit increase offer.   Accepting these offers probably got you deeper into debt in the first place, so we don't want you to accept any more in the future.

Switch Your Credit Card to a Cheaper Option

Does your bank issued credit card have benefits such as frequent flyer miles? If so then it probably has an annual fee and an interest rate somewhere near 20%.  If you have one of these cards, we want you to go into your bank and ask them to switch your card to their lowest rate simple credit card.  In Australia, most banks have a no frills credit card with no ongoing fees and an interest rate closer to 10%.  The flyer miles are costing you more than they are worth.

You can also move your debt to a lower rate by using a balance transfer.  However be careful as there are potential risks with balance transfers.   The first problem with balance transfers, is that they do not force you to cancel the card you are transferring out of.  You can effectively increase your total credit limit, and with it comes the temptation to spend and get yourself even further into debt.  If you take up a balance transfer, then close and destroy your old card.

Most balance transfer deals come with an introductory offer of reduced or no interest.  While this is absolutely beneficial, pay attention to what will happen after this introductory period.  It is possible, that you will move your debt from 10% to 20% (with a few months of no interest in the middle).  Make sure that the end deal is good, before accepting the attractive introductory rate.

Consolidate Your Credit Cards

If you have multiple credit cards, then speak to your bank about consolidating them into a personal loan.  Personal loans generally have a lower interest rate than credit cards, and are designed to be paid off within a known time frame (but can also be repaid faster).  This also gives you the convenience of only having to manage one repayment, rather than juggling between multiple cards.

If you do consolidate your credit cards into a personal loan (or a home loan).  Then we want you to close all your credit cards except one.  The one with the lowest interest rate can stay, but you need to reduce the limit to your target end limit.  As with balance transfers, consolidation has the danger that the credit cards will not be automatically closed.  You have to do this yourself, so once your credit card is paid off, please destroy it, then close the account.

Buying an investment property in Australia, has suddenly become more difficult.  Several lenders have adjusted their policies toward residential investment mortgages, and all the changes have made it more difficult for borrowers.  The banks are reacting to changes announced by the Council of Financial Regulators, which is made up of ASIC (Australian Securities and Investment Comission) RBA (Reserve Bank of Australia), and APRA (Australian Prudential and Regulatory Authority).

On December 9th 2014, the Council of Financial Regulators declared their intention to take steps to 'reinforce sound residential mortgage lending practices'.  On July 20th 2015, the first change was made and the banks have reacted.

We expect that this is only the first of many changes to come for the Australian mortgage industry. On July 20th, APRA increased the capital adequacy requirements for residential mortgage providers which use the Internal ratings-based (IRB) system of credit risk.  The changes were only expected to impact ANZ, CBA, NAB, Westpac and Macquarie,  but  we've seen reactions from all over the industry including:

• ANZ- Have increased the standard variable rate they charge on residential investment property by 0.27% to 5.65%.  This will impact all existing and investment borrowers.
   
• CBA - Followed suit and increased interest rates for investment property by 0.27%.  This will impact all existing and investment borrowers.
   
• NAB- Has increased interest only rates by 0.29%. This will apply to all interest only home loans, not just investors.
   
• Westpac - Has increased the minimum deposit needed for investment loans to 20%.  They have also announced that new investment loans will not be entitled to special pricing.
   
• St.George - Have increased the minimum deposit needed for investment mortgages to 20%.  So far they have not made any change to interest rates.  This will only impact new applicants
   
• Macquarie Bank - Have increased variable and fixed investment rates by 0.27%.  New fixed rates apply only to new loans, new variable rates apply to all existing variable investment loans
   
• ING -  Has increased the minimum deposit needed for investment loans to 20%.  They have also announced that interest rate discounts will no longer apply to variable or fixed new investment loans. These changes will only affect new ING investment loans, not existing.
   
• AMP - Will increase all existing variable investment mortgages by 0.47% from September 7th. In a more severe move,  they are not accepting any new investor applications for residential mortgages. This is effective immediately and is not expected to change until 'later in 2015, depending on market conditions'. If you have made an application with AMP, which has not yet been approved, you should check that they have not refused to process it any further.

Why are Investment Loans Becoming More Expensive?

The Council of Financial Regulators wants to reduce the risk within the Australian mortgage sector.  Reducing the growth of residential investment mortgages is one of the goals set out by APRA, who noted that areas of specific prudential concern include:

• Higher risk mortgage lending - Which includes high loan to value ratio loans, interest only loans, and high loan to income mortgages.

• Growth in investment mortgages - APRA wants to limit growth of investment mortgages to 10% per annum.  A growth rate above 10% would increase the risk factor 

• Loan affordability tests - When banks assess how much new borrowers can afford, APRA wants them to use a minimum buffer of either 7% or 2% above the rate of the mortgage they are applying for.  This means if you are applying for a new home loan with a rate of 4.5%, the bank will test your ability to make repayments at 7%

For now, the changes seem to be centered on investment loans, and while a lot of banks have made changes, not all of them have.  In theory this should cause investors to take out home loans with banks who do not charge an investment premium or who still allow them to make a purchase with less than a 20% deposit.  

Some investors may also decide to move their existing home loans to a lender who is offering better rates to investors. Our guess is that this is intentional.  Banks who are worried about exceeding the 10% growth rate for residential investment mortgages, are trying to make themselves less competitive.  AMP who has already grown by more than 10% this year, is no longer accepting new applications from residential investors.

Borrowing Will Become Harder for Everyone

We think that the Australian mortgage industry will continue to go through a period of change.  Unfortunately these changes will make it more difficult for us take out home loans. We don't have a crystal ball, but we expect that future changes could impact.

Interest Only Home Loans
NAB has already increased the rate they will charge to all interest only loans.  We would not be surprised if other banks follow suit.  Interest only loans are considered more risky, and we expect that they will soon be made less attractive when compared to principal and interest home loans.

Borrowing Limits
Minimum assessment rates will be set, but we are also expecting that the banks will adjust they way they calculate our lifestyle expenses.  Currently most banks use the household expenditure method, which assumes that a married couple will incur expenses of $2,200 per month plus an extra $427 for each dependent child.   We expect that this method will be adjusted to reflect that fact that people on higher incomes also have higher lifestyle expenses. These changes will reduce our borrowing limits for new home loans.

Negative Gearing
The Reserve Bank of Australia has stated that there is a 'case for reviewing negative gearing', but not in isolation.  The generous tax concessions given to investors has been a polarizing topic.  Investment related expenses, including interest on loans, should be deductible.  However the regulators are worried that some people are buying properties with the sole goal of reducing their taxable income.   Negative gearing is a polarizing issue, and any changes will be met with an abundance of opinions explaining why the changes are both right and wrong.

Only Time Will Tell

The extent and timing of future changes is unknown to us.  The Council of Financial Regulators will continue to watch the market and make changes they feel will make Australian mortgages less risky.  We can't say what the next change will be, but we will be watching with interest and will write about it after it happens.

We'd love to hear from your thoughts in the comment section below.  What changes do you think will come?  Will they help improve the Australian market?

When speaking to clients about their finances, we often discuss strategies for effective debt management.  A recent study found that Australian Household Debt to Income levels, have tripled since 1990.  Australians are spending more of their income to service their debts than ever before.  This is a concern given we have a historically low RBA cash rate.

Our record borrowings don't end at home loans.  Aussies are also racking up substantial debt on their credit cards and personal loans. It is not uncommon for individuals to have total borrowings which are a combination of more than one type of debt.  If you have any debt at all, no matter why or how you borrowed, it's always a good idea to make extra loan repayments.

Why Are Extra Loan Payments Always a Good Idea?

Every dollar you owe on your debts is costing you monthly interest. It could be as little as 4.17% on a home loan, or as high as 30% on a credit card.  Making extra payments gets you out of debt faster and saves you money.  This is an opinion shared by  ASIC's MoneySmart 

Thanks to the impact of compound interest, any extra money you pay off your debt today, will continue to save you interest for the remaining life of your loan.  Extra loan repayments are beneficial for two reasons:

1. The Interest Charged on Loans is Higher than the Interest Paid on Savings
If you have a make a lump sum payment on your credit card debt, you can save yourself anywhere from 9% to 30%, depending on what card you have.  These rates are substantially higher than what you could earn on any savings account

2. You Won't Have to Pay Tax on Interest You Save Yourself
If you have money in a savings account, you will earn interest.  This interest is added to your assessable taxable income.  This means that you will pay tax on interest you earn.  If you use the same money to pay down your loan, you will not pay any extra tax for all the future interest you save yourself.  The after tax difference between lump sum savings and loan repayments is shown below:

The above example was from our post  What is a Mortgage Offset Account, but the same benefits can be achieved if you make an additional lump sum payment to your loan.  In our hypothetic example, putting an extra $10,000 in your mortgage will leave you $300 better off than putting the same money in a savings account.

How Much Will I Save Over the Life of My Loan?

To illustrate how much a lump sum can save you over the life of your loan, we have created a simplified hypothetic example shown below:

For simplicity, we assumed that interest rates are stable for the life of the loan, and that this one lump sum is the only additional repayment made.  In this case, putting an extra $10,000 in a 4.20% mortgage for $315,000, will get us out of debt two years faster, and save us over $33,000 in total loan repayments.

What if I Also Increase my Monthly Payment?

Increasing your monthly payment, even by a small amount, can have a profound impact on your loan.  You will notice that because of monthly interest charges, your monthly loan balance decreases by less than your monthly repayment.  Making extra payments will help you reduce your balance faster. Any extra payments you make, will decrease your loan balance.  

As we can see, the total combined benefits are that you will pay off the mortgage 5 years faster and save over $59,000 in total loan repayments.  Increasing your payment by $100 per month will take an exrtra 3 years and over $26,000 of repayments off this mortgage.

How Much Can Extra Payments Save me on my Credit Card?

An Australian Credit Card statement looks something like this:

The statement shows that making the minimum payment  will keep this person in debt for over 20 years.  Increasing this payment by $240.70 will clear the card in two years, and save close to $8,000 in credit card interest.  This is assuming that no new purchases are made with this card.

A Warning on Credit Cards:
The minimum payment on credit cards will decrease as your balance goes down.  It is designed so that most of your repayment every month will only go toward paying interest.  Only making the minimum payment will keep you in debt for decades

I Have More Than One Loan, Which One Should I Pay First?

Not all loans will allow extra repayments.  For example fixed rate home loans and personal loans, do not always allow additional repayments.  If they do, there could be fees or limits to how much extra you can repay.  The first step is to find out which of your loans give you the freedom to make extra payments without limits or penalties.

If you have more than debt, pay off the one with the highest interest rate first.  The higher the rate, the more expensive the debt is to you.  Getting rid of the most expensive loan should be your priority.

Consolidate Your Debts
If you have multiple loans at different rates, you might have the option to consolidate all your debt to the lowest possible interest rate. After consolidation you will only have one repayment to manage, and you will save money by reducing your effective interest rate.   This is illustrated below:

In the above example, our client had a car loan, a credit card and a line of credit which he consolidated into his mortgage.  By doing this, he reduced his effective rate by 0.93% and saved $2,579 in Annual Interest

What About an Emergency Cash Reserve

Life is full of unexpected expenses, you never know when you'll need a little extra cash. It's a good idea to have funds set aside just for these little 'surprises'.  We think your loan is a good place to keep your emergency cash.  If structured correctly, your mortgage can act as a cash reserve.  The simplest way to do this is through a mortgage offset account. 

If you don't have a mortgage offset account, most variable home loans in Australia, offer what is known as a redraw facility. Once you have made extra repayments, the bank will let you withdraw any amount above the minimum payment.  This means while you don't need the funds, you are minimizing your loan interest. If something comes up, the money is available when you need it.  

Caution
A credit card can be used in place of a cash reserve, but using a credit card requires self discipline.  Credit cards have the highest interest rates, and should be paid off as a priority.  If have credit card debt, and want to build an emergency reserve, we recommend gradually reducing your limit.  Leave yourself enough to cover emergency expenses, but focus on paying down the balance, and bringing the limit down.   

Our Closing Word

Debt has become a necessary part of our financial lives.  We want thing s now, not later.  We'd rather take out a loan so we can have that new car today. Quick cash and online title loans, was never faster and therefore more attractive. Savings is less fun than having a big tv or going on a nice trip.  

We are no different here at The Finance Guy, there is no shortage of debt, some of which has been used for less than responsible reasons.  We understand that debt is just part of life these days, but we want you to understand the costs of borrowing and the benefits of early loan repayment.

What are you thoughts about debt management? We'd love to hear from you in our comments section. We appreciate all comments and feedback.

Do you want to get out of debt faster? If you ask anyone with any sort of loan this question, the answer will be 'yes'.  We all get into debt for different reasons, and we all want to get out of it as soon as possible.

We believe that paying off your debts, is one of the best ways to improving your financial circumstances. You'll be amazed at how a small change can help you pay off your loan years faster, and save you thousands of dollars.  

Our tips are based on Australian mortgages, but we think they are applicable to all debts.  We hope that one or two of them will help you become debt free faster:

1. Make Extra Repayments

When we apply for a mortgage, most of us commit to making the minimum payment.  We set up a direct debit, and then the bank takes out their money every month.  We don't want to pay more than we have to because we'd rather have extra funds left over for other purposes.

Try Buying Your Mortgage a Coffee a Day
Try putting an extra $100 per month into your mortgage.  This would cost about the same as a daily cup of coffee, but provide significant savings.  Most of us could put aside an extra $3 a day, so why not try it.  Maybe try sending a little each week or each fortnight.  All Australian mortgages have a BSB and Account number, and most allow extra payments, so you can easily transfer small amounts over as often as you like. 

For Example
If you had a $300,000 variable home loan the minimum payment over 30 years, would be $1,468.  If you chose to pay $1,568, you would pay off your mortgage more than 3 years faster and save over $30,700 in total loan repayments.  This is shown below:

Thanks to the magic of compound interest, paying a little extra, makes a big difference over the life of your loan.   We took a detailed look at extra loan payments, in our recent post on the topic

2. Have Your Salary Paid Into Your Mortgage

This technique, known as salary crediting, is often used as part of a mortgage professional package.  Salary crediting means having all of your income paid into your loan (or offset) account.  Next step is to use your credit card for your monthly spending. Each month you pay off your entire credit card within the interest free period (if you don't then credit card interest will be charged). This is shown in the diagram below:

How Does This Help My Mortgage?
By structuring your spending this way, you ensure that you are keeping as much money as possible in your mortgage at all times.  Interest on your home loan is calculated daily.  For each day you keep extra funds in your mortgage, you are charged less interest

Before you set up a salary credit, you need to ensure that your credit card has interest free days.  Call your credit card issuer and arrange for the full payment to come out of your loan automatically every month.   The interest free days on your credit card can help you pay off your mortgage faster.

A Note of Caution
This technique takes discipline.  You need to make sure that you repay your credit card on time and in full every month.  If you go over the interest free period, or have a balance remaining, then the bank will charge you interest on your credit card.   The rate on cards is a lot higher than that on home loans so if you are not careful, this could end up costing you more.  For this strategy to work, you need to be able to control your credit card spending

We recommend dedicating a credit card for this purpose and reducing the limit so that it is within an amount you can comfortably clear every month.

3. Use a Mortgage Offset Account

If you have a home loan, and you want to keep some cash in a separate account, then  a mortgage offset account can work for you.  This is not suitable for all loans, and usually beneficial for more complex mortgages such as those used for investment.

How Does a Mortgage Offset Account Work
Rather than earning interest on your savings, an offset account reduces the interest you are charged on your home loan. 

Unlike interest you earn on savings, there is no tax payable on interest you don't pay on your home loan.  Added to this, the interest rate paid on savings is lower than what you are being charged on your home loan.  When looking at interest and taxes, an offset is a much better place for your surplus cash, as illustrated below:

As we can see from our example above, Mr. Offset is $300 per year better off than Mr. Savings, because he put his $10,000 in an offset account rather than a savings account.

Caution
Depending on your bank, a 100% offset may not be available.  There may be monthly fees charged for an offset account. Make sure that your benefits outweigh any costs before you set up an offset account.  Remember putting extra money directly into your home loan provides the same benefit.  

4. Negotiate or Refinance to a Better Rate

In the current market, lenders are fighting hard to attract new business, and there is no shortage of good deals.  It is a good time to review your loan and see if there is potential to get a better structure and save yourself some money.

How loyal are you to your bank?  If you could find a better deal would you refinance to a new lender?  Before you do this though it's worth calling your bank and asking them to match the other deal.  They may not match some of the rock bottom deals being offered by their competitors but most of them will reduce your rate in an effort to retain your business

5. Consolidate all Your Debts Into Your Home Loan

If you have more than one debt, you should consider consolidation.  This means moving your debts into one loan.  We recommend moving all your debt to the lowest possible interest rate.  If you have a mortgage, then this is usually where your lowest interest is.

How Does Consolidation Help?
Imagine if you had a mortgage and three credit cards.  You'd have the inconvenience of having to juggle four separate repayments. Moving all your debts to one low rate will reduce your overall interest and save you money, as shown below:

In the example above, we saved $2,579 in annual interest by refinancing our credit cards and consolidating them into our mortgage.  

Before you Consolidate
Look at all your debts and confirm what interest you are being charged.  Make sure that there is no penalty for making an early repayment.  Consolidation might trigger fees,  make sure that the cost of consolidating any given loan does not outweigh the benefits.  For example, if you increase your mortgage so that it goes over 80% of your property value, you may end up paying Lenders Mortgage Insurance, which might outweigh the benefits of consolidation altogether.

6.  Keep Investment Debts Separate

When it comes to borrowing, financial advisers like to separate investment debt from non-investment debt.  We call investment debt 'Good Debt' because it is tax deductible. Non-investment debt is called 'Bad Debt' because it is not tax deductible.  The difference between the two is shown below:

As we can see, for our hypothetical person, Good Debt is 30% cheaper.  This is because they will get a tax refund on the interest paid on loans which were used for investment income generating investments.  Speak to a qualified tax professional before claiming a deduction on any loan

If you have a combination of Good Debt and Bad Debt, we think it's a good idea to focus your attention on paying off the Bad Debt first.  To do this, you should pay interest only on Good Debt, and then pay as much as possible on your Bad Debt.  Once all your Bad Debt is gone, then you can start paying down your Good Debt.

The Logic Behind This Strategy
Good Debt costs less.  For our hypothetical case, it was 30% cheaper after tax.  Every dollar you use to pay down Good Debt, will be 30% more financially beneficial if it were directed toward Bad Debt.  Reducing As Good Debt reduces your tax deductible debt, don't pay it down until you have completely repaid your bad debt.

We recommend you see a tax professional or financial planner to confirm that this strategy will work for you

There is no doubt that mortgages in Australia are cheaper than they've ever been. Interest rates on home loans have fallen, but have they dropped enough?  We decided it was time to have a streetonomic look at mortgage rates to answer this question.

We decided to focus solely on home loans offered by the Big Four Australian Banks, ANZ, CBA, NAB and Westpac.  We limited our research to these four banks because together they represent 84% of the Australian mortgage market.   We found that:

• Since the GFC, banks have passed on 65% of RBA rate cuts to mortgage rates
• The margin between bank standard variable rates and the RBA cash rate, has increased 89% in this time
• Credit card rates have not changed since the GFC
• Bank profit margins on have been declining over this time

How Does the Market Look Now

Mortgage standard variable rates (SVRs) are at an all time low.  Most banks offer a discount variable rate on mortgages of anywhere up to 1.00% off the SVR.  These discounts have been available for several years, so the rates we pay on home loans have moved in line with changes to the RBA cash rate.  

Rates have been falling since the GFC in 2007.  World economies have been dropping interest rates in and effort to stimulate economic growth. Lower interest rates encourage us to borrow more and save less.  However it only works if the banks pass on the savings to us.  

Mortgage rates have fallen, but the same can not be said for credit cards.  The rates being charged on Australian credit cards today is not different from the rates that were charged in 2007.  The official rate has dropped 4.50% in this time.  It is little wonder that Bill Shorten has called for a senate inquiry into credit card rates

Have the 2015 Rate Cuts Been Passed On to Your Mortgage

There have been two cuts of 0.25% each so far in 2015.  The official cash rate has dropped from 2.50% to 2.00%.  The table below shows how each of the Big Four changed their mortgage standard variable rates:

If you have a mortgage with Westpac or ANZ, you'd be happy that the full rate cuts have been passed on to your home loan. ANZ has even dropped their standard variable rate by slightly more  having given a total of 0.52% in cuts on their mortgages.   Customers with CBA and NAB might not be as happy, their mortgage rates have only been cut by 0.45%.  These banks have cut rates by 45 basis points instead of 50.  That means only 90% of the RBA cuts reached home loans held with these two banks.

Have Rate Cuts Since the GFC Been Passed On?

Rates have been dropping since the GFC in 2007.  The RBA has been cutting rates since August 2007.  We compared how the bank standard variable rates have changed in comparison to the RBA cash rate over this time.  Our findings are shown below:

The best performer, ANZ, has dropped their SVR by 294 basis points, while the RBA has dropped the cash rate by 450.  This means that we have only seen 65.33% of the total rate cuts passed on to our home loans since the GFC.  

The Net Interest Margin on Mortgages

We understand that banks have a cost of funds.  The cost of funds is made up of  interest they pay on savings accounts as well on their own borrowings.  The difference between this cost and the amount they charge on loans, is known as their net interest margin.  This effectively measures how much profit the bank is making on every dollar they borrow.

To see how much margin banks make on mortgages, we compared their average standard variable rates to the RBA cash rate.  This does not take into account all the factors which influence cost of funds and profitability.    It only considers on the difference between the cash rate and the SVR, which is what we wanted to look at.  Our finding are shown below:

The graph above does not tell the full story.  It only looks the difference between mortgage rates and the RBA cash rate.  In 2007, the difference between these rates was 1.82%, today the gap is 3.44%.  The margin between the standard variable rate and the RBA cash rate has increased by 162 basis points or 89% since the GFC.

Are Bank Profit Margins Really up 89%?

 According to the Reserve Bank of Australia, major bank net interest margins have been falling since 2007 as shown in the graph below:

According to the RBA, bank net interest margins have actually been falling since 2007.  Yet the margin made on home loans appears to have increased, how is this possible?  In our conjecture, we believe some of the reasons are:

• Rising Cost of Funds - The GFC caused a major unraveling in world debt markets.  Banks no longer had the ability to bundle debt in off balance sheet transactions, access to cheap money has dried up
• Bank Credit Ratings - The GFC has caused banks to become more risky.  Credit rating agencies changed their scores to reflect this, and this means that banks now have to pay more on their wholesale borrowings
• Falling Profits in Commercial Lending - We have heard that margins on commercial lending have been falling, as banks are becoming more competitive with each other in this market. 

Our Round Up

The GFC caused a major shake up in global finance and increased the price banks pay for money.  Along with this, the market for commercial loans has become more competitive and less profitable.  Unfortunately for us, this fall has been offset by an increase in the margins made on consumer lending.

Over the past 8 years, the banks have passed on 65% of rate cuts to home loans and kept 35% of the difference for themselves.  Whether the retained amount was due to profiteering or covering costs, we can not say.  It has been a gradual process as shown below:

As we can see, the two lines look very similar.  Banks normally follow suit and move their SVR after a change in the RBA cash rate.  However, they sometimes keep a fraction of the RBA change for themselves.  This has been a gradual process over 8 years and has seen the gap increase from 1.82% to 3.44%

There is not much we do about this, other than hope that in the future banks see added value in consumer lending.  We could also pray for new legislation to help 'encourage' them to pass on more savings to consumers rather than protect their own profits

As with all streetonomic posts, this information is based on solely on our point of view.  We welcome all feedback and suggestions

If you apply for a new home loan in Australia, it's likely that you'll be offered their 'Professional Package' option.  Most banks have a pro pack option for mortgages. There are slight differences but they generally follow the structure that you pay an annual fee and become entitled to:

• Their Discount Variable Rate - You get a set discount to the bank Standard Variable Rate.  The size of the discount depends on how much you borrow.  The larger your loan, the bigger the discount
• Their Discounted Fixed Rates -  You can get a slightly lower fixed rate than people who aren't on the package.  The discounts don't look as generous as those advertised for variable rates, but we will look at that further later on
• Fee waivers for other bank products - Pro-pack customers can avoid paying fees such as; credit card annual fees, transaction account fees, a fee free mortgage offset, waived application fees on future loans, etc, etc

A pro-pack looks like it'd save you a lot of money, so we decided to have streetonomic look at them. We want to see how much they'd really save you on your mortgage.   Rather than worry about services we might not actually use, we decided to focus our attention on your mortgage. We will look at:

• How Much a Mortgage Professional Package Save You?
• What Variable Rate Can I Get Without a Pro-Pack
• What Size Mortgage do I Need for a Pro-Pack to be Worthwhile?
• Should my Mortgage be on a Pro-Pack

How Much Can a Mortgage Professional Package Save You?

For simplicity, we limited our research to the Big 4, being ANZ, CBA, NAB, and Westpac. We are comfortable limiting our study to these lenders because they represent 84% of the Australian mortgage market.  We started by looking at what discounts are available for a new variable rate home loan of $350,000, our findings are shown below:

Based on first impressions, a professional package is a good idea!  For an annual cost of just under $400 per year, you can save more than $2,400 (after you have recouped your annual fee).  With discounts like this, your professional package would pay for itself until your mortgage is reduced to below $50,000 compared to the standard variable rate.  Are the banks really this generous, or is this just clever marketing? 

What Variable Rate Can I Get Without a Pro Pack?

Professional packages promote their 'discounted variable rate'. The discount is based on the standard variable rate, but is this a fair basis for comparison?  We looked at what rates banks were offering for the same variable loan if the professional package was not taken, our findings are shown below:

You don't need  a professional package in order to pay less than the standard variable rate.  Each bank offers a no fee basic product which will also give you a discounted rate.  They don't offer the other frills, but if all you want it a cheap mortgage, then these rates are available without ongoing package fees.

We compared pro packs and basic options available from each of the big four.  Our finding are shown below:

If you are looking for the best deal on a no frills variable home loan of $350,000, then a professional package may not be best for you.  Unless your mortgage is with CBA, then using a professional package will turn out to be more expensive than the basic option.

$235 per year (at ANZ),may not sound like a big deal, but what would happen if that difference was directed toward your home loan as extra payments. This is shown below:

In the above example, we can see that even though the break free package offers a lower rate, it ends up being the more expensive option. Over the life of the loan, the basic package will get you out of debt almost a year sooner and save you a little over $17,400 in total mortgage repayments.  This is based on the assumptions that:

1. Rates are constant
2. The annual fee for the package is paid through increases to your monthly payments rather than annual lump sums
3. Your repayments made on the basic package are a little more than the minimum for a 30 year loan (but are equal to what they would've been on the package)

The professional package will offer other features which may add further value, which we have not considered.  Depending on your circumstances, it is possible that the extra discounts available through a package will add more value than the annual fee.  A fee free credit card or mortgage offset account, would both save you substantial sums, if you use these features.

What Size Mortgage do I Need for a Pro-Pack to be Worthwhile?

In our first scenario, was based on the rates available for a home loan of $350,000.  It suggested that you'd need a variable mortgage of over $900,000 before the professional package was the cheaper home loan.  This however is not the case.  The discount offered through the package increases the more you borrow.  We looked at how professional packages would perform if you had a mortgage of $500,000, the results are shown below:

Now that our mortgage is worth $500,000, 3 of the 4 banks have increased the package discount offered on variable rate home loans.  We now see that you will save money by using the professional package with everyone except Westpac (they increase their discount once you borrow $700,000).

Should my Mortgage be on a Pro-Pack?

If you are looking for a new home loan, or looking for better options for your existing one, then we encourage you to research all the options.  Whether or not you will save money from using a professional package will depend on:

• The size of your mortgage - If you qualify for a larger discount then the package will be worthwhile
• What other bank services you will use - The professional package is designed to encourage you to bring all your banking to one place.  You can have fee reductions on everything from home insurance to transactions accounts.  We still recommend shopping around, you might find that someone else is offering an even bigger discount without additional fees.

On May 5th 2015, the Reserve Bank of Australia cut the official cash rate by 0.25%.  The cash rate is now at a historic low of 2.00%.  This has been the second rate cut in 2015, the first was in February.  The cash rate has now fallen 0.50% since new years day.  

To the average Australian with a mortgage of $350,000, a cut of 0.50% equates to savings of $145.83 per month in interest.  2015 has been a happy year so far for borrowers.  People with savings are not enjoying the year quite as much.  They have seen the interest income they earn fall to below inflation rates, so in real terms, savings are losing value.

How much better off is the average Australian home borrower?  That depends on how you react to the rate drop.  If you reduce your repayments, you now have an extra $145 to spend each month , if you keep your repayments unchanged, then the benefits are shown below:

If  you took out a $350,000 30 year variable home loan in January, your repayments would've been around $1,948 per month.  If you kept your repayments at $1,948 per month, you would pay off the loan in 26.7 years, and would save a little over $77,000 in total repayments.

Australian mortgages have a reputation for favouring variable rates. In 2014, fixed loans only represented 13.7% of the total Australian mortgage market. With rates at an all time low, we'd think that a lot of borrowers will be asking 'is now a good time switch to a fixed rate home loan?' We thought we'd help you make this decision with a Finance Guy streetonomic look at interest rates and mortgages.

Whether or not now is the right time to lock in your home loan will depend on your personal circumstances.  To help you make this decision, we will discuss aspects which think are common to all borrowers.  These include:

• What fixed rates and variable rates are available
• Your expectation of where rates will go in the future
• How will fixing change the way you use your mortgage
• Our Streetonomic view

What Fixed and Variable Rates are Available to You?

For simplicity, we looked at rates available on a $350,000 home loan. We only looked at the Australian Big Four Banks, we looked at the advertised discount rates offered under their respective discount packages.  Our findings are shown in the table below:

We are seeing some rare anomalies in this table, which may influence your decision over whether or not to fix your home loan.  In our experience it is unusual to see:

• The variable rates on offer are higher than the fixed rates, with the exception of Westpac, who are running a temporary special deal.
• All four banks are offering a lower rate for 5 year fixed than 3 year fixed.
• For CBA and Westpac, the 5 year fixed rate is lower than the 1 year fixed rate, ANZ and NAB are running 1 year specials

What does this table tell us?
Seeing a 5 year fixed rate which is lower than the discount variable rate, is very rare. Seeing a 5 year fixed rate lower than a 1 year fixed rate is extremely rare. The banks are pricing home loans to make the 5 year fixed rate the most attractive option. Does this make it the best option for you, or the most profitable option for them? As with all products, we assume that with loans, profitability is a priority in the pricing process. Banks want you to lock in your mortgage for 5 years because it's best for them (and might be best for you too).

Why Do Banks Want Us to Fix for 5 Years?
It locks us in - Compared to variable, fixed rate mortgages are difficult to refinance. When you agree to 'lock it in'. The bank can't change the interest rate, but if you try and close your loan (because of refinancing or sale of the property), you will incur a 'break cost'. This fee can be quite substantial and may even prevent you from exiting your fixed loan. The break cost is calculated based on how much time was left on your fixed loan, and the difference between the fixed rate you are on and the prevailing variable rate. Fixed rates are the mortgage equivalent of golden handcuffs 'we are locked into this attractive agreement and breaking it in the future will have consequences'

 While we believe the banks are pricing fixed and variable loans so as to maximise their profits, we could be wrong! It is possible (yet, in our view, improbable),  that due to the drop in interest rates, Australian mortgagors have suddenly started asking for fixed rates, and they want a 5 year rate!  This shift in consumer sentiment may have caused the banks to recognise that the most sought after mortgage in Australia, is the 5 year fixed rate, and now they are all fighting for a share of the current 'hot market'. The views of The Finance Guy are influenced by his work (which includes dealing with clients in a mortgage broking capacity), and other stuff too. 

The Big Four represent 84% of the Australian mortgage market. It would appear that only 16% Australians have discovered that better rates can be found, but it takes more extensive research. Want to find the best rate you can get? Just send us Just send us an e-mail and we'll arrange for a mortgage broker to give you an obligation free consultation

Your Expectation of Where Rates are Headed

You want to fix your home loan because it's a good deal right?  It's a good deal in your opinion, but how do the banks view it?  This is unsubstantiated speculation, but we believe that banks price mortgage rates based on their economic forecasts of where interest rates are headed. To us, 4.59% is an attractive rate in 2015.  How sure are you that it will be an attractive rate for the next 5 years?

Banks are pricing home loans in line with their expectation that rates will continue to fall, or remain stable over the next 5 years. Banks are not expecting rates to go up. If you lock in today, you are betting against their opinion.  You are saying 'today's rate is great and will be great for 5 years'.

 Nobody can predict the future, the only thing we know for sure is that in 5 years time, hindsight will well and truly be '2020'.  Banks don't have a flying Delorean or The Oracle form The Matrix, but they do have more resources than us.  They have expensive mathematics software, and overpaid economists to help them predict the future of interest rates.

With the inability to know what is in store for the Australian economy, The Finance Guy does not anticipate the RBA cash rate moving upward in  the near term future.  We don't have access all the data, but we have read the most  RBA Monetary Policy Statement, and RBA minutes of the board meeting, (even though the minutes felt like hours, no make that weeks). 

 Banks believe that Australian interest rates are on a downward trend, we agree! We read through 5 pages of RBA data to arrive at this opinion, and here are the highlights:

• Australian Economic Growth is below average - so we need more economic stimuli, how about another rate cut?
• Unemployment Rate likely to remain 'elevated' - Need to fight unemployment? Let's drop interest rates!
• Inflation was lower than forecast - The books we read at university told us that dropping interest rates could cause prices to increase.  This is not happening, therefore the economy is safe for further interest rate drops!
• Global Growth is low - The whole world is dropping rates because of the economic times, we're not wrong by joining in are we?
• China is slowing - our major export partner, if they don't buy our coal, copper and other mining stuff, who will?
• Growth with trading partners eased - China isn't the only customer buying less of our exports.  It's almost  as if the down turn in commodities is somehow correlated to the Australian economy!
• Term of trade are expected to decline - money coming into Australian will decline relative to money going out.  Wait, didn't we already say that with the China thing?

How Will Fixing Change Your Mortgage?

Getting a guaranteed rate is awesome, why ride the variable rate roller coaster when you can lock it in? Yet 86.3% of Aussies have variable rate home loans. So what's the problem with our fixed rates? In Australia, there are some important differences between variable and fixed rate mortgages, here is our list:

Portability of the Mortgage - What if there is a better deal?  If you have a variable loan, the costs of moving are usually less than $500, and can be zero (if your new bank covers the costs).  Getting out of a fixed loan isn't so simple, you will incur break fees?  Are you willing to pay that fee if you find a better deal?  What if you need to sell your property, will this fee impede the financial feasibility of selling?

Flexibility - Do you want to make unrestricted additional repayments to your mortgage?  Do you want convenient, no fee, online access to your redraw?  These features are unlimited with most variable loans, but not with fixed loans.  Fixed rate mortgages have limitations when it comes to extra payments and redraws.  

Mortgage Offset Accounts - If you are an investor, then y.ou should look into the benefits of a mortgage offset account. 100% offset accounts are available on most variable rate home loans.  The same can not be said for fixed rate loans.  Most fixed loans either offer a partial offset, or no offset at all.  We have seen some with a 100% offset, but they are accompanied by elevated interest rates.  Fixed rate mortgages do not work well with offset accounts!

Our Streetonomic View

Australian mortgage rates are currently at a historic low. The RBA rate might fall further, it might not.  We can't predict the future, you can, please contact us!  Locking in has never looked better, yet neither has variable.  It's a tough decision!

Our quickfire advice to borrowers considering fixed is:

1. A fixed loan is fixed - If you fix your mortgage, you are locking in with this bank for the duration of the fixed loan.  If you close the loan early due to property sale or moving to a new bank, you will pay fees
2. Is there more to your mortgage than the rate - Fixing provides certainty, to you and the bank.  You know the rates won't change, the bank knows you won't leave them.  If you need features such as redraw, offsets or unrestricted repayments, fixed rate loans may not be right for you

There is a Middle Ground - If you are considering fixing, but are unsure about it, then maybe consider a split loan. You do not need to fix your entire mortage! Banks will let you choose a combination between fixed an variable rates. You can have your desired balance between variable flexibility and fixed certainty. If you choose to do this, then you are stuck with your bank for the duration of the fixed rate.

Finding the right bank to suit your personal circumstances is important. This is something The Finance Guy can help with at no cost to you!. Just send us an email, or leave a comment below

If you have a home loan, then a mortgage offset account, is a great place for your extra cash.  It will help you pay off your home faster.  With an offset account, you can save thousands of dollars and take years off your mortgage.

Need access to your funds?  Not a problem.  A mortgage offset account is an 'at call' cash account.  There is no obligation to lock your funds in.  An no penalty for making extra deposits or withdrawals.  An offset account gives all the features of a cash account including:

• Internet Banking
• Access through ATMs
• Direct Debits
• Cheque books

How Does a Mortgage Offset Account Work?

You will not earn any interest in your offset account.  The balance will be used to 'offset' the interest you are being charged on your linked home loan.   If you owe $315,000 on your mortgage, and have $10,000 in a 100% mortgage offset account, then you will only be charged interest on $305,000.  

Paying money into your Mortgage Offset Account, has impact on interest, as making extra repayments on your home loan.  The balance which mortgage interest is charged = Mortgage Balance - Mortgage Offset Account Balance ($315,000 - $10,000 = $305,000).  

The more money you have in your mortgage offset account, the less interest you will pay on your home loan.  Saving interest on mortgage, is better than earning interest from a savings account for the following reasons:

• The Interest Rate is Higher -  The interest rate banks charge on loans, is higher than the rate they pay on savings accounts.  A mortgage offset account, will save you more money than a savings account will earn you.
• There is no additional risk - A mortgage offset account and a savings account, are both cash accounts.  By using an offset account, you are increasing your return without increasing your risk.
• You will pay less tax - Any interest you earn from a savings account, is part of your annual income, you will pay tax on it.  There is no tax on the interest you will save from using your mortgage offset account.

How much will you save with an offset account?

Let's look at a hypothetical case to compare two borrowers, Mr. Offset, and Mr. Savings.  For simplicity, we'll assume:

• They each have a mortgage of $315,000 charging interest at 4.40%
• They each have a savings account which pays 2.00%
• They each have $10,000 to put in cash account
• They both pay interest only on their home loans
• They both have interest paid out of their savings accounts (so there is no compounding).
• Mr. Offset puts his $10,000 in a mortgage offset account
• Mr. Savings puts his $10,000 in a savings account
• They both pay income tax at a rate of 30%

After 12 months, Mr. Offset would be $300 better off than Mr. Savings this is illustrated in table below:

Mr. Offset has reduced the interest on his mortgage by $440,  at tax time, he pays no additional tax.  Mr. Offset used his $10,000, to improve his cash flows by $440. This is an after tax return of 4.40% on his cash

Mr. Savings  has not performed quite as well.  He earned $200 interest, but pays income tax of $60. Mr. Savings has used his $10,000 to improve his annual cash flows by $140.  This gives him an after tax return of 1.40% on his cash.

From this example, we can see that by using a mortgage offset account, Mr. Offset has more than tripled the benefits of a savings account.  You can use our Mortgage Offset vs Savings Calculator, to adjust the variables, and see how much a mortgage offset account will save you.

How much will a mortgage offset save me over the life of my home loan?

Let's use another hypothetical, this time Mr Offset:

• Has a home loan of $315,000 at an interest rate of 4.40% (which does not change over the life of his loan)
• Is making principle and interest repayments of $1,607 per month
• Has $10,000 in his Mortgage Offset Account  - this balance is constant for the life of his loan

Mr. Offset will pay off his mortgage almost 2 years faster and will save a total of $34,247 in total repayments.  This is shown in the graph below:

Can a Mortgage Offset Account Work as a Savings Plan?

Let's assume that Mr. Offset wanted to save an extra $100 per month, and he put this in his mortgage offset account.  We now have a case where:

• Has a home loan of $315,000 at an interest rate of 4.40% (which does not change over the life of his loan)
• Is making principle and interest repayments of $1,607 per month
• Has $10,000 in his Mortgage Offset Account  - this balance is constant for the life of his loan
• He is depositing an extra $100 per month in his Mortgage Offset Account

By making regular contributions, Mr. Offset is gradually increasing his savings as the balance in his mortgage offset account grows.  He will pay off his mortgage 4.6 years faster, and save $89,488 over the life of his loan.  This is shown in the graph below:

The regular savings of $100 per month, have acted in the same way that additional mortgage repayment would.  It means that Mr.Offset has further accelerated the repayment of his home loan.  By using a mortgage offset account and a regular savings plan, he has saved almost $90,000 over the life of his loan.

Should I Use a Mortgage Offset Account, or just make additional repayments to my home loan?

Most Australian variable rate mortgages, allow you to make unrestricted additional repayments. Sending extra money directly to your loan account would have the same benefits as using an offset account.  Rather than offsetting the balance, you are directly reducing it.  You can access your surplus funds through your available redraw on your mortgage.

To determine if a mortgage offset account is better than additional payments you'd need to consider:

• Accessibility - Mortgage redraw can take a few days to process, so if you want ready access to your funds, an offset account is better.  
• Redraw Fees - Some banks allow you to perform redraws free of charge with internet banking, others charge a fee 
• Offset Fees - Some banks charge a monthly fee for using a mortgage offset account, others provide this service free of charge.
• Is your loan for investment? - If you have borrowed to invest, then your accountant will explain that for tax purposes, it is usually better to have a mortgage offset account.  

If you have a home loan, then we hope that you are not keeping your cash in a savings account.  Saving mortgage interest is better for you than earning interest.  Whether you use a mortgage offset account, or pay directly into your loan, the benefits are there.

We hope this information was useful.  We'd like to hear your feedback especially if you can share information on how you are paying off your home loan faster.

Australian investors love property, it  has been a star performer.  Most of us can't wait to buy that next investment property.  A well structured investment property portfolio can be a great source of wealth creation.  It will provide long term capital growth, give you tax savings today, and be a source of income in the future.  It's no wonder that we love our bricks and mortar.

Over the past five years, more and more Aussies have been buying investment properties with their super funds. Many are using a special type of home loan designed for SMSFs.  It's called a  'Limited Recourse Borrowing Arrangement' (LRBA), 

Setting up a super loan requires an accountant and financial planner.  They will help you adjust your super fund so it is set up for a SMSF mortgage.   You will need a financial plan recommending you purchase a super property. You might also need to do a little tweaking of trust deeds before you are ready to go.

The market for SMSF lending is small, but is growing fast.  In June 2009, the SMSF share of the mortgage market was just under $500 Million.  By June 2014, this figure had grown more than 17 times and was over $8.5 Billion.   Superannuation lending is one of the fastest growing sectors in the Australian mortgage industry.  Australians are already using property as a way to build wealth for retirement.  It makes sense that we'd want to use our superannuation for this.  After all, the purpose of super, is to be our retirement savings vehicle.

Like all mortgages, you need to qualify for a SMSF Loan.  The bank will assess a superannuation home loan based on:

• The income earned by the members of SMSF - 9.5% of your income goes into Superannuation as a compulsory employer SG contribution.  This can be used to make loan repayments
• The potential rent from the property you purchase - Rent will be paid directly into your superannuation fund, and will help with loan repayments.  Some banks will consider 100% of the rental income, while others might only consider 80%.  They want to see that you can afford it with slightly less than expected rent.  This is a risk management strategy
• Cash available in your SMSF for the property purchase - You will need to have enough funds in your SMSF to pay stamp duty, and a deposit of at least 20% (for residential investment property).  You can not borrow more than 80% with an SMSF.  95% loans are available outside of super.
• Your SMSF Portfolio Value - After settlement, your SMSF will have cash and investments other than the property.  The banks recognise that these investments will earn an income, and will consider it as part of the loan servicing calculations.  To determine how much income your investments will generate, they apply a 'deeming rate', which is usually around 4%, of the value of your SMSF (excluding the new property).

Is it a good idea to borrow for a SMSF investment property? 

If you ask the Financial System Inquiry, they'd say 'don't do it, it's a bad idea'.  In their December report, they made a recommendation that all super lending be banned.  They feel that the use of loans brings too much risk into superannuation.  They fear that if people lose money from investing through SMSF Mortgages, then it will increase the burden on the Age Pension.

The FSI is definitely not a fan of SMSF lending and imply that this activity contradicts the intended purpose of superannuation. In their report, they say: 

the objective for superannuation is a savings vehicle for retirement income, rather than a broader wealth management vehicle

Our answer to this, is that it depends on your circumstances.  Like all investments, it's great for some, and terrible for others.  Before you buy a Super Property, you should consider:

• Your Time to Retirement -  By the time you retire, your aim is to have either paid the loan off completely, or at least have it down to a level where the rent alone can cover the loan repayments and all ongoing expenses. This is known as a cash flow positive property.  If you plan to retire in 5 years, it's probably not a good idea to have a 30 year mortgage which can only be serviced if all your SG contributions and investment income is used.
• Time Frame of Your Investment -  Superannuation should focus on long term buy and hold investments.  If your plan is to invest in a 'hot suburb' and sell in 5 years at a big gain, then this should be done outside of superannuation.
• Your risk profile - Using debt increases the financial risk of any investment.  The deal might look great today, but how would it look if the interest rate was 2% higher?  Interest rates in Australia are currently at record lows, but that doesn't mean that they won't increase over the coming years.  You need to understand and accept the risks before committing to a Super Loan
• The Portfolio Value of your SMSF - There are banks which allow you to spend all your funds and hold the property as a single asset in your SMSF.  Others require you to have a minimum 'net tangible assets' (NTA), invested in other assets.  If you are buying a property as a single asset, or are very close to the bank deemed minimum NTA, your SMSF might lack diversification.  Put simply, you've got too many eggs in the property basket.
• The Property being recommended - Unlike standard residential mortgages, Super Loans can only be used to buy income producing assets.  This means there are some restrictions.  For example you can only buy a property which is ready for tenants.  You can't not borrow to build a new property or even for renovations.  Buying a property to 'fix up', works well, but is a bad idea with Super

The fact that your SMSF can qualify for a mortgage, does not mean that it's a good idea for you to get one.  Make sure you are comfortable with all the risks, and have considered other options before you enter a long term loan agreement.

We hope this information was useful.  This has is our streetonomic opinion on SMSF Loans.  As always we'd love to hear from you.  Keep sending emails and writing comments.  We don't mind if it's opinions, feedback, or to ask for more detailed information.

Along with two thirds of the market, we believe the Reserve Bank of Australia will cut the official cash rate by 25 basis points when they meet after the Easter long weekend, on Tuesday April 7th. The official cash rate will drop to an all time low of 2.00%. 

 Retirees who rely on interest as a source of income, will not be happy.  The interest they earn on their savings has fallen by more than 72% since 2008, when the official cash rate was 7.25%. At a rate of 2.00% it is unlikely that term deposits will keep pace with inflation.

Those of us who have variable rate debts, such as home loans, will benefit from the rate cut.  A reduction in our monthly interest means we can either make smaller payments, or pay our debt off faster (or a combination of both).  You can see what impact the rate cut will have on your mortgage, with our repayment calculator

A recent history of Australian Interest Rates

The chart below shows how the RBA has moved our cash rate since the February 2000

Why do we believe the RBA will cut rates?

The mining boom, which sustained our economy through the GFC is now over.  Commodity prices are starting to fall, as is the outlook for growth in the  Australian Economy.  The Reserve Bank administers Australian  monetary policy.  We believe they will reduce the interest rates with the intention of keeping Economic Growth within their target range.  

It is hoped that when interest rates drop, we will be encouraged to spend more money (and therefore sustain Economic Growth).  According to the text books, this works by simultaneously discouraging saving and encouraging borrowing.  This means that more money is being spent, which is good news for our GDP.

People will save less - If interest rates are lower, this decrease our marginal propensity to save. If people earn less interest on their savings, they will be less willing to allocate funds to saving, and more likely to use the money on consumption

People will borrow more - The cost of lending will drop.  People with variable loans will now have access to extra cash each month, some of which will be spent.  People already planning on applying for new loans will be more willing to borrow larger amounts as the cost of borrowing comes down.  Some people who planned to borrow down the track, might decide to borrow now.

How much will you save on your home loan?

If interest rates drop by 0.25%, then for every $100,000 you own on your mortgage, you will save $20.83 in monthly interest.  That is assuming that the full rate cut is passed on to us.  In a previous post, we looked at the lending margin Australian banks make on home loans.  We looked at the difference between the RBA cash rate and the average standard variable rate of the big four banks.  Our findings are shown below:

As we can see, back in 2007, the average standard variable rate was 1.82% above RBA cash rate.  By mid 2013, the gap had grown to 3.42%.  This is because banks don't always pass on the full impact of changes to the cash rate.  For example, in May 2012, the RBA cut rates by 0.50%, but on average the banks only reduced their lending rate by 0.36%.  They passed on two thirds of the cut to customers, and kept a third for themselves as an increased lending margin on their loans.

We can no say whether the bank retained the difference because of increases in their cost of funds, or because they were increasing their profit margin, but we assume it's a combination of the two.  Most people do not pay the full standard variable rate and are on a discounted variable rate.  While special offers are around from time to time, this discount has usually been at a maximum of 0.70%, and has not increased substantially since 2007.

Want to see how your own bank changed their lending margin since 2007?  Have a look at our lending gap calculator.  You can compare any two banks to each other or the average.

If you are an Australian with an existing home loan, credit card, or any other debt, then now is a great time to review your loans.  The lending market in Australia is currently extremely competitive, and there are plenty of banks out there willing to offer you a better deal if you move your existing loans to them.  

I recently spoke to a friend who has an existing home loan of $315,000. His current bank is charging him 5.44%.  By shopping around, he discovered that because his loan to value ratio is below 70%, he can refinance and his interest rate would reduce to 4.64%.   

He asked me to go over the details with him to ensure that he wasn't missing any catches. This is a substantial reduction in interest.  Based on his current balance, he will save $2,520 per year  or $210 per month, in interest charges.  After looking over the details of both his current mortgage and this new offer, he decided that he will proceed with the refinance.

My friend decided that he would keep his repayment unchanged, so the saving in interest would be like making extra repayments.  By doing this he will pay off his mortgage four years faster and save  just over $72,000, which means his total repayments have reduced by around 13%  This is shown below:

While my friend will save a lot of money and be mortgage free faster, not all refinance deals will save you money.   If you are looking to refinance your home loan, you should consider all the costs and benefits such as:

Exit Fees - Depending on how your current mortgage is structured, you may have to pay significant fees before you leave your bank.  This could mean that you are better off staying with your current bank for a little while longer

Reversion rates - Make sure you understand what your ongoing rate will be.  The lowest rates on offer are often on either short term fixed loans (3 years or less), or on honeymoon variable deals (this means that they offer you a big discount but it's only for the first year or two).  Somewhere in the small print, there will be a 'reversion rate'.  This shows you what you will be paying once the discount or fixed period has expired.  To avoid this, try and find banks who will offer you a competitive discount for the life of the loan.  There is no guarantee that the deals you can get in 3 years will be competitive, so why settle for a discount that expires at that time?

Making the minimum payment - When you refinance your mortgage, in most cases, the bank will automatically offer you a new home loan at the maximum term of 30 years (unless you request a shorter term).  The minimum payment on the mortgage documents is designed to pay the home loan off in 30 years, but you have the option to pay more than the minimum.

The loan documents my friend received from his new bank were for a term of 30 years.  He could pay as little as $1,622 per month, rather than the $1,950 he has chosen to pay.  If he decided to make only the minimum payment, he would have an extra $3,932 per year to spend on something other than mortgage repayments.

Reducing your payments by over $300 a month may sound tempting, but if my friend were to do this, he would extend his loan term from 25 years to 30 years.  So while he is paying less every month, he is doing so for an extra 5 years.  If he had done this, then the refinance would have cost him around $17,000, as shown below:

It is tempting to reduce your monthly payments and have more cash in your wallet today, but this could have a negative impact on your finances in the long term.  

My friend kept his repayments unchanged. This means that he is using all of the savings he is making on interest to pay off his loan faster.  Paying the minimum would cost him more over the long term, but there is always a middle ground.  For some of us, reducing the monthly cash flows is very important.

If my friend chose to pay $1778, he would save $2,000 per year in mortgage payments, and would pay off his home loan in 25 years.  This means he is debt free at the same time as he would be with his current bank, but has saved just under $35,000 in total repayments.  He hasn't saved $72,000, but he has still made a good saving and has improved his monthly cash flows. as shown below:

May all your refinances save you money and get your home loans paid out faster.  As always we love hearing from you, so please send us feedback

The Reserve Bank of Australia has released their September 2014 Financial Stability Review.  The section on household and personal finances, was of particular interest to us.  The RBA has noted that they are concerned about the growing level of interest only home loans in Australia.   

The study found that of new loans approved, approximately 30% of owner occupiers and 60% of investors have selected interest only loans.  The concern is that borrowers are taking on too much risk, specially at a time when interest rates are low, and expected to start rising in the future.

The average mortgage taken out in Australia was for $320,000 at a rate close to 5%.  Borrowers tend to choose interest only because the payments are lower.  It means more cash to spend today.  Salespeople of all sorts, will promote interest only options based on saving more tax.  They will also assure you that there is no need to pay more than interest only, because the value of the property will go up over time.

Based on the average home loan, the difference between interest only and principle and interest payments, is shown on the table below:

The difference in payments is $384.50 per month, or around $12.65 per day.  While some will tell you that you need to 'keep your negative gearing', we disagree.  Over the course of the loan, you will have paid in just under $135,000 in extra repayments, and in exchange will have an extra $320,000 of equity.  

If you consider the extra payments as a monthly investment, that's a return of 5% (which is no surprise).  The best part is that the returns are tax free.  If you sold your property, you would not pay any more capital gains tax than someone who had been paying interest only for 30 years.  

The difference is that you have gradually paid off your loan, while they have not, as shown in the graph below:

A risk free, tax free return of 5% is a great investment.  It's like having a savings account at a bank paying 7.14% (if your tax rate is 30%).  I can hear all the salespeople screaming 'what about the negative gearing?'.  

The interesting thing about negative gearing, is that it only works when you are losing money.  It allows you to claim a tax deduction on the losses you incurred by paying interest on an investment loan.  This means that your costs including interest exceed the rental you are earning on a property.  Your income is reduced because your investment is losing money.

If your tax rate is 30% then for every $1 you lose in interest, you can claim back 30 cents on your annual tax return.  This leaves you with a loss of 70 cents.

Conversely, if you have a property which is positively geared, this means that your rental returns are covering your expenses, and you are making an ongoing profit, which, you will pay tax on.  

Assuming again a tax rate of 30%, for every dollar of income your property generates, you will pay 30 cents tax, leaving you with an overall gain of 70 cents.

If you had a property with $1,000 of negative gearing, you would lose $700, if the same property was positively geared and made $1,000, you would be up $700. This is shown in the table below:

If you have the additional funds, paying down the mortgage is a great idea. Paying interest only is the cheaper option now, but down the track, when you achieve positive or neutral gearing, your property will be paying for itself, and you will be accumulating equity.    

If you are using negative gearing purely as a strategy to reduce your annual tax, then maybe consider working less.  It would have the same effect.. it would reduce your income and in effect you would pay less tax.

What do you think?  Would use a tax reduction strategy if all it did was reduce your income?

When it comes  to home loans, Australians have a reputation for being risk takers.  This is not because we borrow for irresponsible purposes (everyone does that).   Our reputation comes from our strong preference for variable loans.

The Australian Bureau of Statistics housing finance report, shows that in July 2014, fixed loans represented 13.7% of the total market.  Our willingness to ride the interest rate roller coaster, has made us stand out when compared to European or American borrowers.

Australians have learned to accept the risk.  Borrowers know that if the Reserve Bank makes a change to the official cash rate, then they will see a similar change in their mortgage interest in the not too distant future.

Fixed rate loans have less financial risk.  They offer certainty for both the lender and the borrower, who can manage their cash flows with out the risk of interest rates moving against them.  Why is it that less than 1 in 8 loans in Australia is fixed.  

Here at TFG, we believe the Australian loan market is designed to favour variable loans.  It's not a case of taking the risky option, it's a case of taking the cheaper option which offers better flexibility.  The banks want us to take variable loans, so they design their offerings in a way to make variable more attractive.  

We had a quick look at the loans offered by Bank of America.  The most popular loan (according to their website), is a 30 year fixed loan adjustable rates are available on request.  A similar look at the Commonwealth Bank of Australia, shows an emphasis on variable loans, with the longest fixed term being 5 years.

While our sample of two banks is hardly extensive, it does show that in Australia it is difficult to fix a loan for more than 5 years, while in America, it is encouraged to fix for the life of the loan. The low volume of fixed loans in Australia is due to the supply side, not the demand side.  That is, Australians might go for 30 year fixed loans, but they are simply not available.  Does this make our lending market more risky?

We do not believe that  banks are gamblers.  The banks understand that if rates go up, there is a risk of borrower default, and if rates go down, their cash flows are reduced.  The banks have risk management processes in place to deal with these risks.   

To reduce the risk of borrowers defaulting  during rising interest rates, the banks assess applications with an interest rate buffer.  This means if you apply for a loan at 5%, the bank will test your ability to repay the loan at 7% (or whatever margin they use).  This is a way of testing the applicants ability to cope with rising interest rates.

When rates fall, the banks receive less interest from existing loans.  However they also pay less interest to their funding sources.  Banks get their funds from the wholesale market as well as from savings held on deposit with them.  They pay interest on savings, and are charged interest by the wholesale market.  This is known as the cost of funds.  

The gap between this cost of funds, and what they charge for loans, is known as the 'lending margin' to the bank, it's profit.  In a variable market, their cash flows will be safe as long as they maintain this lending margin.   For example, if the cost of funds goes up 0.2%, they would need to increase their variable rate by 0.2% to maintain lending margin. 

 Using shorter term funds to finance a book of variable loans, seems to have been a good strategy during the GFC.  Australian banks managed to side step the crisis, and have performed very well since that day in August 2007 when the world of credit changed so drastically.  If the banks are risk takers, then perhaps the risks have paid off.

Interest rates all over the world fell sharply during the GFC, and in most cases are still at very low levels.  The Finance Guy wanted to know how well Australian banks have managed their lending margins since the GFC hit.  

For simplicity, we used the RBA cash rate as our cost of funds.  We compared this to the standard variable rate charged by banks for loans.  Rather than pick on a single bank, we looked at the average standard variable rate of the Big 4 Australian banks.

Our findings are shown in the graph below:

As we can see the gap between the cash rate, and the average variable rate has risen from 1.82% to 3.42% since the GFC.  Is this due to increases in other funding costs (not reflected in changes to the cash rate)?

The flexibility of the variable system has enabled Australian banks to  grow their margins since the GFC.  The real lending margin is not 3.42%.  Most borrowers have a discount variable rate, and as we noted, the actual cost of funds, may differ from the RBA cash rate.   

The Finance Guy still wanted to know if Australian Banks have performed better or worse than other banks with 'less risky' lending structures.  We could have spent hours analyzing 7 years of financials, but this has been done for us, but the stock market.  We are happy using historic stock prices as the foot prints for prior financial performance.

In the spirit of keeping it simple, we only looked at two stocks.  Bank of America, and Commonwealth Bank of Australia.  It seemed fair to use the same two companies we looked at earlier.    A quick visit to Yahoo Finance,  gave us the chart below:

The price of CBA shares has risen more than 40% since the GFC, while the price of BAC is still at less than half of what it was in 2007.   Over the same period, the Dow Jones has risen almost 30%, while the Australian ASX 200 index has fallen approximately 5%

The Finance Guy agrees that fixing loans will reduce interest rate risk.  Australia has a lending market which is based on variable rates.  The Australians are exposed to changes in interest rates, but it's a system which seems to work for them.  

It would be interesting to see what would happen if a 30 year fixed loan were available in Australia.  I wonder how many people would want this.