Derek Miles October 20, 2009

It is a brave person who directs or advises a client whether to fix or not. There are many reasons why a borrower may want to fix and it is not just pure mathematics. Yes, one can model expectations of future rates, but does anyone really know what the rates are going to do over the next 5 years? I suggest not. As a mortgage broker I work through the issues with the client including using a simulator. I also ask them to read my article first. Only then should a borrower consider whether to fix after taking all the considerations into account. You can read my article and view an example of the simulator on my http://www.financialmilestones.com.au/news.php - see article “To fix or not to fix”
I don’t think any lender or broker should persuade a client one way or another about fixing. Give the client all the information and let them make up their mind. If a lender or broker gets it wrong, then guess who is going to end up in court.

Ted October 21, 2009

If you go on “historic” data, there is no way in the world you would fix an interest rate. Take a look at standard variable versus 3 year/5 year fixed over the last 20 years.

SMc October 22, 2009

Good advice Ted. I agree entirely and what Derek is saying is also true that you need to take into account a borrowers preferences when they are deciding whether to fix. But too many lazy individuals out there are copping out of their responsibility to guide and recommend to clients. It may surprise people that fixed rates are not actually an estimate of what variable rates will be over a given period.

There is no basis for any action legal action against you if you present the facts and even form an opinion - don’t just say to a client “you work it out”. Clients are paying you for professional, informed advice - so provide it. If sueing for wrong opinion’s on fixed rates is so common and easy, can someone let me know the last court case? Instead, COSL can show you many examples of brokers who were so frozen with advice, that they didn’t even give the client an opinion by recommending rate lock over the last year.

Brave - yes, foolish - no. If we were docile enough to believe that fixed or variable was an each way bet, we’d be ignoring the fact that it’s only been an advantage 3 times, each during a very short window fo weeks, over almost 20 years for you to fix a rate. But, come that time, yes fix. If you say “we don’t know”, then you are being negligent - noone will sue you, but negligent nonetheless.

SMc October 22, 2009

By they way, if you are unconvinced by the above, several months ago, a CBA branch offered, without recommending a fixed rate of 8.5%to one of my clients on her $1.25M loan. Because she was old school and remembered rates at 17%, she said she was going to take it, until i told her to sit tight on her variable. Foolish of me? ppffft.

Derek Miles October 22, 2009

Hello SMc,

I think I gave the wrong impression in my first post. I am not advocating that brokers abbregate themselves from giving advice. What I am saying though is that brokers should not engage in rate predictions (and this is what some do and it seems that author of the article is also engaging in rate prediction). And that is why I have this simulator. I engage with clients to give me their impressions of what variable rates might do over 5 years. Then we can model this against the prevailing fixed rates. In my article and in my discussions with clients I get to the bottom of why they may want to fix or what issues do they have about rates that would make them think that fixing is appropriate. Or indeed whether they should employ a compromise strategy. You are right, there are certain windows for fixing and one has just passed. But many clients sit back thinking that rates will go lower and try to pick the bottom. My concern with rate prediction is that if you get it wrong, then a client could sue. It is better to get their input, expectations and personal circumstances first before engaging in advice. There are too many article authors or media writers giving us their opinion of what rates will do and when it is a good time to fix or not. Clients can’t sue them but they can sue us if we do the same thing.

Derek Miles October 22, 2009

PS. And using the line that there has never been a court case to date is false security. Do you want to be the first one? Can you afford to defend yourself in court? I would rather not take the risk. As long as I have given the client the opportunity to discuss fixed rates and the benefits or negatives and conducted the simulation and the needs analysis, then I have done the best one can do to assit or advise the client.

Comment October 22, 2009

Geez Derek, you live in fear. Actually no, I’m not worried, because court cases arise from a lack of care and diligence.

I’d be more worried about the statement on your website that says “If you are looking at investment property loans, then it is more advantageous to fix because you are getting a tax deduction for the interest” Can you explain/verify that qualified tax advice please??? Other sections have good advice but obviously we are happy to differ.

Derek Miles October 22, 2009

Thank you for pointing this out. I have changed the article to “may”. When you take into account the tax benefit of interest cost on rental properties, then the simulator can show an advantage to fixing - again dependent on the prevailing fixed rates, client’s personal circumstances and variable rate expectations etc which is part of the advice model. I am qualified to give tax advice.
Yes, I am happy to accommodate our differences.