15 April 2021
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Claytons fix

Peter Switzer
21 July 2009

If you are someone who is worried about fixing your home loan, I have an alternative way of fixing, which means you could beat the bank, insure against being hurt by high interest rates, have a nice pile of money for an emergency, pay off your home loan more quickly and save heaps of dough. If that sounds like you, well read on.

Interest rates rise

Just when we learn that business inflation has fallen by the biggest amount in 10 years, the Canberra-based think-tank, Access Economics, says interest rates will rise next year. So this will intensify home borrowers interest in whether they should fix their interest rates. 

The fixers and non-fixers

Last week, I did a spot on Today Tonight where they told viewers that Aussie Home Loans' John Symond was not advocating fixing now but Mortgage Choice thought it was the time. I have had plenty guests on my show — SWITZER — on Sky News Business Channel, who have said it’s time to fix and to do it as long as possible! (They are experts but they still could be wrong.)

Be warned, if you are pondering this one, the interest rate gurus are very wary about fixing rates. The former founder of Wizard Home Loans, Mark Bouris, once told me that fixers often lose out.

Now, part of the reason why history says fixers lose is that they generally lock in when interest rates are close to the top of the interest rate cycle. We are now around the low-point, with Access suggesting that we could get one more cut before Christmas and then over 2010 and 2011 rates would rise. But the nagging question is always — by how much?

Those who say it’s time to fix recommend fixing for five years or more, but remember this is not advice — it’s simply their best guess.

Fixed versus variable
I went to the Commonwealth Bank website to see what are the comparisons between fixed and variable rates of interest. The standard variable rate was 5.74 per cent, but when you add fees to its true, or what they call the comparison rate, it was 5.87 per cent. On the other hand the five-year fixed rate was 7.34 per cent.

For simple calculations, if interest rates rise two per cent in two years, the variable rate could go to 7.87 per cent, but until then you could have been losing by paying the higher fixed rate for two years. However, for the next three years you will win, if rates remain high.

Then again, rates might take two years to get to 7.34 per cent and then they might hover around this level, which undermines the value of the fix.

But there are a lot of mights in this story of mine. Yes, fixing is a gamble and there are those who say inflation is coming because of the stimulus packages around the world that have been created to beat the Global Financial Crisis.

The cocktail loan 

Okay, so what does someone, who is heavily in debt but scared of fixing and losing, do? Some experts say you can take a cocktail home loan, which might be half-fixed and half-variable. This means each interest rate rise would hit you by half and it’s this half you can attack to pay down as quickly as you can, if getting rid of your loan is a high priority.

Importantly, remember you can’t pay off a fixed home loan without a penalty and it’s wise to understand what it might cost if you, say, want to sell your house which means you would need to wind up your fixed loan. But I think there is a better way for those who are scared about fixing, being trapped and losing.

Another strategy 

This is where my Claytons Fixed Home Loan trick comes in. You could follow these steps to set it up:

  1. Make sure you are on the lowest variable interest rate possible and you have a redraw facility. While banks advertise the standard variable rate at 5.74 per cent or 5.87 per cent  (the comparison rate), many borrowers are on loans around five per cent.
  2. Find out what your monthly repayments would go up to if you locked in a fixed rate of, say, 7.34 per cent for five years.
  3. The repayments for the fixed will be bigger and you then decide to pay this amount into your home loan on the variable rate. You are overpaying and this will mean the excess payments start to reduce your principal.

This action delivers two great pluses. First, you pay off your home loan early and you pay a lot less to own your home. Here is a simple example from the team at eChoice: “Increasing the repayments on a 25-year $100,000 loan at seven per cent by just $20 a week will cut the loan by five years and save almost $30,000 in interest!”

Discipline required
So, what happens with the Claytons fix?

You have to have the discipline to stick to the extra payments and an automatic deduction is a good idea. Of course, if rates rise you may have to redraw some money to make the new, higher payments, but it would take some time for the rate rises to catch up on your forward, extra payments that you made in the early years. You have a protective buffer.

What can go wrong? You don’t stick to the plan. You redraw money too early for other things and you undermine your buffer. The worst case would be that rates go unbelievably high and your Clayton’s fix might not be as helpful in the latter years when rates have gone through the roof. Once again, I remind you that fixing is a gamble.

What can go right? Rates do rise but not much higher than the fixed rate that determined your higher repayments, and that you pay down a fair bit of your home loan and reduce your total interest repayment bill.

Why is it called a Claytons fix?

Many years ago there was a non-alcoholic drink heavily advertised on TV called Claytons and it was billed as “the drink you have when you’re not having a drink.”

Of course, if you try the Claytons fix and rates don’t go as high as some predict, the drinks will certainly be on you! Good luck with your decision but remember it’s a gamble. 










For advice you can trust contact Switzer Financial Services.












Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.



 

 

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