Fix or variable rate????

[m.sewell]

Hi,

Just wondering what peoples thoughts are on fixing loans at the moment and what the advantages and disadvantages are.

At the moment I have three loans with offset accounts. Set at a variable rate of 4.8%.

PPOR - $260k P and I
IP1 - $360k Interest only
IP2 - $200k Interest only

Any ideas would be greatly appreciated as I am only new to the game!

 

[Brady]

4.8% is a pretty good variable.

Fixing isn't about the rate, it's about knowing that they repayments are going to be the same for a fixed period of time.

Will a rate change now make a big impact?

Also consider costs involved in breaking a fixed loan, usually no offset, harder to change lenders, borrowing extra funds.

Personally i have some fixed some variable across whole
Portfolio would be close to 50/50

 

[m.sewell]

Thanks for your reply. Do you think it would be worth fixing my investment properties and keeping my PPOR variable as I am paying it down as quick as I can?

 

[Mick C]

Most fix do not have an offset account attached, so yes if your gonna fix ...fix your IP, so that you can pay down your PPOR + use an offset account.

Remember if you fix, there's a cost to break the contract if you sell or refinance during this time + it's a bit harder to draw on equity as your stuck with that one lender.

Are you planning on using equity? any plans to sell?

 

[m.sewell]

Thanks Mick.

I have no plans to sell IP's in the next few years. As soon as I have access to more equity I will start looking again. Locking interest rate in for maybe 5 years could be a good idea?

 

[Mick C]

5 years is a lonnnngggg time...and generally not a good idea if your an investor.

+ the 5 years fix rate is relatively high.

 

[m.sewell]

How long of a period is recommended to fix? I will have access to more equity in 18 months.

 

[Mick C]

wellll if you want to take full advantage of this equity in 18 month time, than you would fix for 1-2 years.

3 things can happen if you fix for 5 years.

1. The current lender who you fix with may turn around and say you have reached your "serviceability" with them, so you need to keep your option open

2., The bank valuation might come back lower than expected, also may need to refinacne

3. The bank may have a "min" loan amount for splits...ie $50,000- $100,0000 so if you fix you won't be able to split a seperate equity loan out unless you meet the min loan amount.


i would only do a 5 years fixed if you dont plan on doing ANYTHING to that property for a good 5 years.

 

[m.sewell]

Thanks for your help Mick!

 

[peaches]

There is no fee to break a fixed rate loan if interest rates go up. The break fee is an 'economic cost' fee and so would only apply if rates were lower at the time that you break.

IMO - it is unlikely rates will stay this low much beyond this year. With the current government constricting the economy unemployment will rise, labour costs will fall and business will want to borrow more.

So if you have stable employment, good tenants and no plans to make changes to your portfolio my advice is a fixed rate lets you sleep well.

BTW - there are some good fixed rates with 100% offset and Heritage allow unrestricted repays with redraw (short of paying out the loan).

 

[Brady]

Fixing the both IP loan is reasonable, likely look <3 years better rate and gives you bit more flexibiltiy. Also as mentioned already would look to change PPOR to IO and put all funds into the offset.

 

[peaches]

change PPOR to IO and put all funds into the offset.

I didn't read that OP planned to rent out his PPOR - and so if that is not the case why change it to IO. There is no valid reason not to reduce his non-deductible debt as quickly as possible.

 

[Brady]

I didn't read that OP planned to rent out his PPOR - and so if that is not the case why change it to IO. There is no valid reason not to reduce his non-deductible debt as quickly as possible.

Valid reason is he might change his mind. The amount of people I've seen who have never intended to rent out their PPOR but end up doing it... also in other thread OP mentioned that his current PPOR was his 1st house he purchase, not too many people buy 1 house and live in it for there whole life. Alot of people do have attachments to 1st homes and like to keep them as rental properties.

He would still be reducing the non-decutible interest being charged the same as paying directly off the principal but will be reserving his cash for later flexibility.

 

[nhg]

Fixing rate is a risk mitigation strategy.

Things to consider are:
1. what are your plans for the property
2. could these plans change
3. will you be accessing funds in the foreseeable future

Fixing for 5 years is a really really long time.

I fixed mine for 3 years and am already looking at paying the break fees to refinance. I definitely would not recommend fixing the full amount and with the cost of having the loans fixed, I question wether it is really worth it in the long run.

 

[Brady]

I fixed mine for 3 years and am already looking at paying the break fees to refinance. I definitely would not recommend fixing the full amount and with the cost of having the loans fixed, I question wether it is really worth it in the long run.

What's the reason for needing to refinance?

Might shed some insight.

 

[m.sewell]

Thanks guys for the advice. My plan is to eventually sell the PPOR when I have finished minor renos. It is not a good rental as it only has two bedrooms. The median price for the area is only around $280k. As I paid $300k for it I don't want to overcapitalise by building in more rooms. I plan to keep doing minor renos to PPOR and upgrade each time. As well as building my portfolio. I plan to buy when I have more equity. LVR is at 80%.

 

[peaches]

I fixed mine for 3 years and am already looking at paying the break fees to refinance..

This would suggest that you fixed for the wrong reasons or did not make an informed decision.

Do not fix to try and beat the market - fixing is not an investment strategy. It is a state of mind, you fix when you feel comfortable and in the knowledge that rates could fall further. However less than 3 years ago variable rates were around 8 percent. Traditionally fixed rates are half to one percent above the standard variable where as at the moment they are as much as one percent below. But I repeat do not fix in order to try and beat the banks, it is a gamble at best that few win.

 

[Brady]

Thanks guys for the advice. My plan is to eventually sell the PPOR when I have finished minor renos. It is not a good rental as it only has two bedrooms. The median price for the area is only around $280k. As I paid $300k for it I don't want to overcapitalise by building in more rooms. I plan to keep doing minor renos to PPOR and upgrade each time. As well as building my portfolio. I plan to buy when I have more equity. LVR is at 80%.

If that's the case scrap IO idea if planning to sell

 

[nhg]

What's the reason for needing to refinance?

Might shed some insight.

This would suggest that you fixed for the wrong reasons or did not make an informed decision.

It wasn't to beat the banks. I just changed strategy and new opportunities presented themselves.

I was somewhat misinformed by bad MB advice. Have since changed brokers.

My strategy was solely based on manufacturing growth which I did and I had enough money saved and was continuing to save enough to purchase a property every 6 months without needing to refinance.

I hadn't counted on leaving work to start a business and the relatively large gains from what I see as an unexpected housing rush.

An opportunity has come up for me to refinance. Apart from my offsets, I will be able to access another $200k+ in LOC and a large borrowing capacity to finance several purchases (pre-finishing the granny flats I'm building). The break fees are $4k for 2 properties so quite worth it in my books.

 

[Brady]

It wasn't to beat the banks. I just changed strategy and new opportunities presented themselves.

I was somewhat misinformed by bad MB advice. Have since changed brokers.

My strategy was solely based on manufacturing growth which I did and I had enough money saved and was continuing to save enough to purchase a property every 6 months without needing to refinance.

I hadn't counted on leaving work to start a business and the relatively large gains from what I see as an unexpected housing rush.

An opportunity has come up for me to refinance. Apart from my offsets, I will be able to access another $200k+ in LOC and a large borrowing capacity to finance several purchases (pre-finishing the granny flats I'm building). The break fees are $4k for 2 properties so quite worth it in my books.

$4k instead that much when you have the ability to get $200k extra and complete further purchases.

I guess there is something that OP needs to consider is the lender you fix with going to be able to assist you as you need during the fix period if you need help.

Was the ability to have the $200k with a different lender due to higher valuation or increase serviceabilty at the other bank?