Rate cutting by big banks continues for both mortgages and term deposits

If you are on floating at 5.74% with 300,000 then change to fixed at 5.25 then you can save over 1500$ per year. Worth it as banks refuse to drop floating rate accordingly.

"Refuse" Mortgage ?  - thats probably because floating wholesale rates haven't gone down, whereas 1yr wholesale rates have - what were you expecting ? 

Margin on floating has increased over 3 years so plenty of scope to drop for their long suffering customers. Fixed rates are tempters to get more 'lock-in' - banks are getting worried with overr 60% floating, they can now easily switch....

The bank's lending margins must be bigger than they portray. I'll give you a recent (This week that is!) example.

My brother-in-law has a substantial mortgage, $500,000+ on floating, so he decided to shop around to see what he could eke out of the competing banks. He found they were tripping over one another to comply and cajole him over to their side. In the end he was offered 5.15% on a floating rate; 4.99% 1-year fixed or 5.55% 3-year fixed!!   Not bad I said! falling off my chair!!

Now after years of paying through the nose at his current institution he's faced with some really good choices but he doesn't know what to do? He asked me, "should I stay floating and hope that the swap rates fall further and then fix" I said maybe he should just stay floating and enjoy the low rate offered. I suggested the notion that the rates weren't going to be moving for at least 6 months and when floating rates do go up (and he jumps off that rate automatically) in 3 years time he would still have been better off than if he'd fixed.

What to do guys, any thoughts, given the rates quoted?

Yes the margin on both floating & fixed has increaed dramtically over the past 3 years because the spreads banks have paid on their funding has risen dramatically over the past 3 years (from zero to around 150bps currently) - what has changed that suggests that their cost of funds has changed such that they can reduce this ? in fact in the past few weeks its risen if they had go to the market ?.

Exp - yes shopping around in this environment is very rewarding as the banks are hugley competitive for business at the moment and will squash margins to retain/gain market share - nothing new there but certainly intense at the moment..

The risk your brother-in-law takes is that when the market finally get spooked on an impending rate rise, even if they think its still 6 months down the road, a very small minority will be quick enough to lock into fixed rates before they disappear higher. Even in the past 2-3 years we've seen a situation where long term fixed rates rocketed nearly 1% within 24 hours (certainly a few days) - the wholesale market talking in minutes to react, retail borrowers days, or weeks. And there was a third less people floating then than now i.e. the next move could be even stronger.

You don't know the timing on the event, and its possible, even likely, not to be before year's end, but no one can be sure when - fix some, leave some floating is the right approach. All eggs in one basket is what the mugs do as they over-rate their ability to see it and act quickly enough

A 6 way split loan, with each loan fixed at 1year, every 2 or 3 months might be an idea. Theres 1500$ or more savings to be made annually on a typical loan moving from floating to 1 year rare.

But of course they won't change their mortgage repayments, they'll just pay it off quicker because that's the wise thing to do ? So not so much like a 2% pay rise as a growing level of comfort lying in bed at night

Thanks for your comments Grant. I was thinking that if he took a Float/18-month/3-yr split he should cover a pretty good hedging base from which to react as events happen along the next volatile 3 years. And they will be volatile, the markets are not in for an easy ride. I told him that although the temptation is always there to fix and forget for 5-years, the reality is that [that] volatility and the opportunities it will create might make him regret anchoring himself to a 5-year rock. Are things going to be interesting or what, it makes the actual GFC of 08/09 look rather predictable and formulaic in being dealt with. There is no predictability left, which is why flexibility is the only way to survive - and I don't just mean in life and marriage!

That's true, sounds like a 4-way split might be on the cards as he isn't planning on moving or selling any time soon. Expect the unexpected has never rung more true than in today's climate; only a fool would claim to know what is happening, as that would make him clairvoyant.

If there are any young couples reading this, draw yourselves a grid with fixed and floating on the top 2 column titles, and decrease  and increase in interest rates as the row titles. You'll find that 3 of the results you input produce mild boredom, disappointment or a faint smile.  One of the results spells disaster if you are highly leveraged (as we all are when we're young) buying in a market which is so far away from fair value it's not even funny any more, and fancy ourselves as clairvoyants (as all of us do, young and old). Then go buy yourself Fooled by Randomness by N. Taleb.

Then disabuse yourselves of the notion that the bank wouldn't lend you money if they thought you had a chance of crashing because they would lose money too at that LVR they're graciously providing you.  The LVR only applies to your balance sheet, not theirs.  They have something called  a FBR which is why bank gurus talk scared in a downturn but never seem to break a sweat on TV. (See article on bank profits).

Finally, look around you  and see our older citizens who are now poorer by about 6bill because they tried to squeeze  blood out of a stone.

Good luck with your decision. The casino is full of people that got lucky long ago and convinced themselves it was skill.

PS I'll send you 10 bucks towards your first piece of dirt if you can tell me what FBR stands for.

You can get very good benefits by bargaining with the bank. They do want your business and will deal to get it.  So go and hussle now.

Just what is the right option of fixed etc will change month to month and there is an imevitable crystal ball factor when deciding.  Really you just don't know.  But you have to make a decision and even ignoring it is a decision that will have a fallout.  Good or bad.  So go and think hard and/or toss a coin.

The is a volatility risk and even fixing puts this off for only a limited time.  So the best protection is to get rid of debt.  Hard hard work that, takes years.  Although every day you do it gets better.  And it really pays off.  Bigtime.  So go sweat.

I need some advice please...I would probably characterise myself as an attractive banking proposition (more than $500k in debt, high equity %) and currently have a good chunk of that on floating rate. At the time of taking out the loan the bank offered a 0.50% off their published floating rate (5.75%). Now it seems the market is more competitive and I want to get them to sharpen their pencil. Can someone in a similar situation please tell me if I am being realistic asking for another 0.25% discount, or is this unlikely? it would be good to know before I ask as I can be a bit more demanding/aggressive with the question...thanks!

It seems that Exponential Naiviety above has got down to 5.15% but what discount is this off the floating rate and what bank please?

fbr=first banking reserve....so what?

Has anyone noticed how menacing Bernard looks in the picture?

Jandel - you should easily get another 0.25 off the published floating rate in addition to the 0.5 they are already offering

Or maybe he's trying to strike the sexy pose...boost viewer numbers perhaps?