With Impending Interest Rates, 1 Million PPOR Loan, More in Offset Vs 2% 3-Years Fixed for Risk-Adverse Individual?

xdigger on 27/10/2021 - 13:34
Last edited 11/08/2022 - 16:55 by 2 other users

I know this is a crystal ball question asking for predictions on how the interest rates will move, but on a hypothetical situation with a 1 million loan on a PPOR and being offered 3 years fixed at 2%, should I split the loan into 600k offset and 400k fixed 3 years 2%, or 400k offset and 600k fixed at 2%?

Assuming I have 400k cash after paying the deposit/stamp duty. Profile is a risk-adverse busy professional who has no time to explore investing options due to work and family. Thanks.

Financial

closed Comments

  • MrThing on 27/10/2021 - 13:43
    +6

    3years at 2% is a good offer for a risk adverse person imo

  • dasher86 on 27/10/2021 - 13:49

    Splitting the loan seems like a possible option but depends if it cost you to split the loan.

    Another thing to look into is something like Bendigo Banks product where you can get a fixed rate but still have an offset.
    https://www.bendigobank.com.au/personal/home-loans/complete-…

  • brendanm on 27/10/2021 - 13:57
    +1

    Would the bank happily lock in a $1m mortgage at 2% for 3 years if they thought that rates were going to go up?

    • avoidfullprice on 27/10/2021 - 14:08
      +1

      Absolutely. Their fees rates would factor in the variable rate rises. Beside, it is pegged to the fixed term bond yield

    • lubos on 27/10/2021 - 14:10
      +2

      The bank is not taking any risk. They will hedge position.

  • rektrading on 27/10/2021 - 14:19

    Cash interest rates aren't going up.

    The only thing that keeps going up to the right is inflation and the price of assets at a rate of >5x 1Y.

    • xdigger on 27/10/2021 - 14:29
      +1

      So locking in a larger sum at 2% for 3 years would make sense right?

  • Paul Atreides on 27/10/2021 - 14:56
    +1

    i would imagine that your offset portion should be some calculation between your initial offset amount and average expected net savings over the fixed rate period.

    Therefore this should be between than 400k, plus your expected savings over the fixed rate period / 2. Then adjust accordingly based on your risk appetite, your own views on the curve in which your expect the rate will rise, whether you'll need to draw off the offset amount, etc.

    • xdigger on 27/10/2021 - 16:15

      Thanks, your formula is the answer I've been looking for!

  • funnysht on 27/10/2021 - 17:58
    +1

    im curious why bank gave you that low for 3 years?

    • MrThing on 27/10/2021 - 18:54

      +1

      which bank**

  • bmxr on 27/10/2021 - 19:04

    We locked in $1.3m at 1.79% fixed for 2 years with CBA. Took maybe 5 minutes over the phone and was done in 2 business days.

  • marsqu on 27/10/2021 - 19:48

    Had a similar dilemma, and couldn't find a online calculator to help with decision. But I guess it is a bit of crystal ball..
    End of the day, we chose split loan with 20% in variable component; and remainder in 5 year fixed. (We thought 20% was about the amount we could comfortably save, in offset)..
    I'm still a bit disappointed that there's ongoing monthly account keeping fees - but learning for next time..

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