Hi Everyone,
Fixing my interest rates has been in the back of my mind for the last year. I always feel like its too late, and it probably is, but Im getting a little concerned that the rises could just keep going. Im really after some feedback from you forum gurus on at what point I should stop and say "hey, I need to fix in a hurry". Here is my situation.
I have 2 properties. 1 PPor and 1 IP.
PPoRes: Loan amount $376,000
Interest only : variable :split loan :MacQuarie $280,000
Interest Rate8.07%
repayments $1832 p/mand
NAB $96,000
Interest Rate 8.48%
repayments $673.45 p/mInvestment Property : Loan amount $116,000
NAB : Interest only : variableInterest Rate 7.35%
repayments $724.13 p/m
Rental Income: $1083 p/m
Combined salary income: approx $60,000 (after tax)
with 2 Kids…Thanks for all your help in advance…
Ozi Batla
Rather than looking at timing of fixing your interest rate you need to look at fixing your costs of interest for a certain time period up to 5 years. No one has a crystal ball on what interest rates will be. You may want to have a split loan on the PPOR . So you can have the option of being able to pay off say for an example 30% (variable) of your principal amount and have 70% of the loan fixed. So that you can have both worlds with a variable component and a fixed component. The interest on the PPOR is not tax deductible and is a larger loan than the investment loan so it would seem prudent to try and fix the interest costs of the PPOR loan while being able to pay a component off the loan if needed via a variable component plus there may be some extra features you are entitled to or using with the variable loan which having a part component of would keep these features. You have some breathing space with the investment loan as the income is greater than the expenses but you may wish to fix your costs for a time period so that you know what your expenses will be for a certain time period.
Getting fixed is a gamble against banks who have more expertise to predict the interest rate trend.
xpine73 wrote:Getting fixed is a gamble against banks who have more expertise to predict the interest rate trend.And how well do the banks do?
These predictions are from May 2007 when the RBA cash rate was 6.25%. Not a single one correctly predicted 6.75% just 6 months later. AMP and Commsec even believed rates would fall over the course of last year!!
To the original poster: forget about where rates are going to go. Making a bet and winning/losing isn't the only relevant factor. You need to also weigh the consequences of each outcome.
Possibilities:
- you fix and rates fall below your fix
- you fix and rates rise above your fix
- you fix and rates fall below your fix then rise above your fix
- you fix and rates rise above your fix then fall below
- you fix and rates go roughly nowhere, but you're still paying a higher rate
- ???
What are the consequences of each outcome? What are the most extreme realistic possibilities?
I'm not giving advice here, but I went through a similar exercise with a friend back in 2006. She decided to fix her loan at ~7.1% despite a 'gut feel' (no doubt brought on by listening to other opinions) that rates would fall back below this level at some point in the near future. Why did she fix? Because she decided the negative consequence of the possibility of rates rising much above 9%, which was frankly repossession, outweighed the negative consequences of possibly paying more interest than absolutely needed over the life of the loan.
She could have gone the other way, literally betting the house on the hope of gaining a couple of thousand dollars a year in saved interest…
Cheers, F. [cowboy2]
It is always interesting to see what banks etc have predicted and to review these 6-12 months later to see how accurate they may have been. If any of the banks had predicted the rise in rates (even reading into the underlying inflation rate) they would have looked like they were profiteering if they foresaw official rates rising to 6.75% (more money for the banks/who would go to the bank offering the gloomiest interest rates etc?). Notwithstanding that, none of the banks, even in their wildest dreams, had factored in a crash in the sub-primes in the US and how that would have global implications (even though they were selling derivatives which were originating in the US).
foundation wrote:xpine73 wrote:Getting fixed is a gamble against banks who have more expertise to predict the interest rate trend.And how well do the banks do?
These predictions are from May 2007 when the RBA cash rate was 6.25%. Not a single one correctly predicted 6.75% just 6 months later. AMP and Commsec even believed rates would fall over the course of last year!!
Cheers, F. [cowboy2]
lol as always Foundation love your work!!! Its great to see someone who 'think's they know what they are talking about followed up by someone who 'knows' what they are talking about!!
I do not think anyone would be game to give advise as to whether to fix or sit it out at the moment, as a broker we receive regular information, with so many conflicts on rates. As mentioned above split loans may be an option; and considering your limits if rates do continue their upward spiral.
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