- Hi,
I didn't get any replies to the following question in the somerset forum, so i was wondering if someone from here might be able to help me with it:
I'm looking for a loan from a lender that will give me the option to fix up to 50% of my loan for 5 years when interest is at their lowest. All else being equal, if I was given a choice of two lenders:
1) lender A with the cheapest variable loan, but with a higher fixed rate;
2) lender B, with a higher variable, but the lowest fixed rate
Should I go with lender A, pay a var lower rate and fix later or lender B, pay a higher var rate but fix when rates are at their lowest? Which would you go for and why?
p.s what's the difference between this forum and somerset? Any old posts that I could look up on?
My inclination would be to go with the one that has the cheaper fixed rate. A fixed rate is exactly that, fixed. The margins on variable loans could vary significantly during the current credit crisis, especially if it gets much worse. Also if at some point in the future you desperately had to get out of the fixed portion of the loan, the break fees would be lower.
Not too familiar with somerset, but the creator of this forum was Steve McKnight, (author of a few books) so you will find the vast majority of investors here would have cashflow positive property portfolios.
You will need to crunch the figures and also factor in how you think rates will rise or fall over the coming 5 years.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
The reason your question may have not been answered is it is bordering on giving financial advice.
No one can really advise you on where the interest rates are going to end up being.
A person usually fixes the interest rate more to make certain what their expenses are going to be.Have you heard of interest rate averaging
What you do is you take out fixed rates on portions of your loan
So 20% at 5 years
20% at 4 years
20% at 3 years
20% at 2 years
20% at variable rateThe 20% variable lets you pay off more if you need to
20% goes variable in 2 years time and at this stage you can chose if you want it to remain variable or fix it for 5 years
20% goes variable in 3 years time and at this stage you can chose if you want it to remain variable or fix it for 5 years
20% goes variable in 4 years time and at this stage you can chose if you want it to remain variable or fix it for 5 years
20% goes variable in 5 years time and at this stage you can chose if you want it to remain variable or fix it for 5 years
The advantage of doing this is that a small portion of the loan goes variable each year and doesn't largely effect the overall loanI know someone who has done this with the one lender.
And I also read about it in Australian Property Investor MAgazine several months ago.
Quote:Have you heard of interest rate averaging
What you do is you take out fixed rates on portions of your loan
So 20% at 5 years
20% at 4 years
20% at 3 years
20% at 2 years
20% at variable rateThe 20% variable lets you pay off more if you need to
20% goes variable in 2 years time and at this stage you can chose if you want it to remain variable or fix it for 5 years
20% goes variable in 3 years time and at this stage you can chose if you want it to remain variable or fix it for 5 years
20% goes variable in 4 years time and at this stage you can chose if you want it to remain variable or fix it for 5 years
20% goes variable in 5 years time and at this stage you can chose if you want it to remain variable or fix it for 5 years
The advantage of doing this is that a small portion of the loan goes variable each year and doesn't largely effect the overall loanHi Duckster, Thanks I've never heard of this before, I'll look into it.
Duckster,
I would love to know which API edition this article you're referring to appeared in so I can check this out too.
thanks,
Carlin
While there are certainly benefits in fixing your home loan rate (e.g certainty in your interest expense and potentially paying less interest than you would under a variable rate), one must not forget that you lose flexibility in your property investment/ownership decisions (Or at least it is going to be very expensive).
What I am referring to is the break cost fees to exit a fixed rate loan before the fixed term ends. We've all heard of stories of borrowers trying to exit fixed rate that they have locked in at 8% or so last year and how they have to cough up thousands of $'s in break costs fees if they want to refinance.
So you would have to be very certain that you won't need to sell or refinance your loan in the ext 1,2,3….5 years. There could be numerous reasons why a borrower would need to sell or refinance…….job loss, divorce, job relocation, your business needing extra cashflow from equity in yhour property, receiving an offer to buy your property at a price too good to refuse (which is not uncommon for under $500k property during this period of FHG $14k-$21k madness)……..These types of events can happen when you least expect it……
So just keep in mind the flexibility issue when considering fixing versus variable and not just look at which option costs you less in interest expense.
Edvico_kvn wrote:While there are certainly benefits in fixing your home loan rate (e.g certainty in your interest expense and potentially paying less interest than you would under a variable rate), one must not forget that you lose flexibility in your property investment/ownership decisions (Or at least it is going to be very expensive).What I am referring to is the break cost fees to exit a fixed rate loan before the fixed term ends. We've all heard of stories of borrowers trying to exit fixed rate that they have locked in at 8% or so last year and how they have to cough up thousands of $'s in break costs fees if they want to refinance.
So you would have to be very certain that you won't need to sell or refinance your loan in the ext 1,2,3….5 years. There could be numerous reasons why a borrower would need to sell or refinance…….job loss, divorce, job relocation, your business needing extra cashflow from equity in yhour property, receiving an offer to buy your property at a price too good to refuse (which is not uncommon for under $500k property during this period of FHG $14k-$21k madness)……..These types of events can happen when you least expect it……
So just keep in mind the flexibility issue when considering fixing versus variable and not just look at which option costs you less in interest expense.
This is all true, however banks often will be happy for you to break out of a fixed loan at NO COST if the variable rate at the time is HIGHER than your current fixed rate.
I just did this in September last year with both ANZ and CommBank – no charge. There is of course the usual switching fee, BUT zero break costs.
cheers
I spoke to my broker and he said it is possible to fix your loan as Duckster said, but he advised limiting it to 50% of the loan. This leaves room for some flexibility.
Some people have started fixing. However, variable rates still haven't reached the bottom. Rates may still continue to go down. I'll wait until variables start going up before we look at fixing.
What do you guys think?
……. missed the boat…as the fixed rates have been increased over the last few days….
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