Real Estate Mortgages: To fix or not to fix?

How do you find your way through the mortgage real estate lenders maze to arrive at offers that are worth following up? By Harry Senlitonga for the Australian Property Investor – Jan 2007.

To fix or not to fix? This is a common question, and one which is difficult to answer because it involves accurately predicting the value of cash on the money market at any given time.

As with all betting ventures, there’s a 50 per cent chance of getting it right, as well as a 50 per cent chance of getting it wrong. However, once you understand the way bank lenders work, it will help you evaluate special offers on fixed real estate mortgages.

Basically, the money market rate for the fixed period of time of your loan will reflect how much the money market values its cash over the same period. The lending institution ‘buys’ the money on the money market and then ‘sells’ it to you. Daily fluctuations in money market transactions will often occur because of this. However, the natural process of supply and demand also affects the rate offered. for instance, if no one is fixing their real estate property mortgages, institutions will offer a low interest rate to try to generate business. Conversely, if everyone is fixing their bank loans, there’s not as much incentive for the money lenders to keep interest rates temptingly low.

When is the best time to fix your property mortgage?
Unfortunately there’s not best time to gain any advantage in fixing your mortgage for your real estate investment or home property, or part of it. There’s no evidence in the past five years to suggest a particular week is the one to garget for the best deal.

CANNEX’s historical statistics on a three-year fixed rate loan shows the average margin was 1 per cent. We’ve seen figures as high as 1.85 per cent and as low as 0.43 per cent above the money market rate. The graph in the API Magazine shows the average margins taken over a 52 week period. When timing your move to a fixed rate, it’s essential to monitor the money market rate. This is available as a table in the finance section of most newspapers.

Is it a good deal?
A little research is always wise before you sign on the dotted line and CANNEX has created simple methodology that allows you to determine if an offer by your bank lender is right for you. Simply check the interest rate percentage offered by your bank lender against the current money market rate for the same period of time as the fixed term in question.

The closer the gap between the two, the better the deal and the more confident you can be in signing up for the fixed real estate property mortgage product in question.

Henry Senlitonga is a sector manager with financial services research group CANNEX.

Question and Answer: Which one is best?

Question: I’m looking for a fixed rate real estate home loan but am becoming increasingly confused about the so-called ‘good deals’ on offer. Is there a benchmark I can use to compare fixed rate loans before I decide on the best deal for me?

Answer: Fixed home property loans fluctuate on a day-to-day basis and the reason for this is largely due to the price the lenders pays for the finance you’re accessing. For example, the rate the lender pays for a three-year fixed property home loan on the money market will determine the rate at which that three-year fixed loan is offered to you. To ascertain whether or not this is a good deal, simply compare interest percentage offered with the money market rate. The closer the gap between the two, the better the deal for you.

For more information, please visit the API Magazine web site.