Thursday, 13 November 2014

The variable rate hasn't varied for 5 years...

Talking of future-proofing...

I have a fairly good grasp of mathematics, but my understanding of numbers dissolves away when you start putting currency marks next to them. 

Our land loan has reached the end of the five-year fixed rate we signed up for, and we have to decide what to do next. 

If we do nothing, it defaults to a variable rate. Alternatively we could go for another five-year fixed rate, or a ten-year fixed rate. I just got a phone call from the bank, and heard some percentages--I think I heard 1.5% and 1.7%--but I really need to sit down and look at things in writing.

According to this website, the current floating base rate is 2.475%. In fact, the flexible rate has been 2.475% since February 2009. That dark blue line is not part of the grid, it is part of the data.

Is that some kind of joke? Isn't variable supposed to mean that it can vary? 

It looks like we would have done better getting that rather than the five-year fixed rate. 

I know past results are no indicator of future performance, so just because the floating rate has stayed the same for the past five years doesn't mean it will stay the same for the next five years. 

Whatever we do will probably be wrong. Going for the fixed rate seems the most sensible approach since we may be losing out, but it will be by a predictable amount from each month's salary. The risk is much less than going for a floating rate loan, and suffering an interest rate hike. 

The ten-year fixed rate is at a historical low of 2.9%, which surely means something. The rate the bank charges is a little more than 1% less than this. Of course the numbers don't know the history, and they are probably just as likely to keep going down. As long as interest rates stay above zero, the banks will still be winning.

On the other hand, talking of risk, perhaps we should leave it with the flexible rate. This would then cause the interest rates to go up, which would be connected to increased inflation, which would in turn mean that the value of our loan goes down, and we would be owing and paying less in real terms.