Recently we had a bit of a blue with a customer about the interest rate he was being charged. We wrote his loan shortly before the onset of the US financial crisis and, all things considered, the rate was very competitive. But he was with a non-bank lender and his rate has climbed a bit lately – about the same as other non-banks but slightly more than the standard banks. He has since been approached by another bank (a reputable and substantial bank) about fixing his interest rate. Nothing wrong with a little bit of competition between lenders.
However, this discussion took place about 8 to 10 weeks ago when (strangely) some financial analysts were still forecasting a rate rise or two. We haven’t been thinking this way for a while and urged our customer to take time and consider because what the intervening bank was proposing was a 5 year fixed rate marginally lower than that which he was currently being charged.
In view of recent economic data, some commentators have suggested the Reserve bank will need to cut the cash rate to 5 percent from the current 7.25 (see previous post). This morning Alan Kohler said “the cash rate will need to be around 5 per cent this time next year, possibly in the 4s”.
To cut to the chase, our customer was panicked and took the advice of the other bank and moved to a five year fixed rate at close to 9 per cent. I wonder how a fixed rate of nearly 9 per cent will compare to the prevailing discounted variable rate in 12 months time and how the advice of the other bank will be viewed.