To all you finance gurus,
Currently have two IP's and looking to buy number 3. Considering fixing our interest rates to guarantee affordability for next five years. Is this a good idea or a really stupid one? Looking at 7%.
Opinions needed!
Jacksson
Hi Jacksson,
To fix or not to fix… that is always the question that will never have a complete and accurate answer. The best to time fix is when it does not seem like the best time to fix – ie, when there is still downwards momentum in interest rates. As soon as anyone gets a whif that rates may go up, long term fixed rates start climing. An example of this is that we managed to fix some clients at 4.99 for 3 years only a few months ago, that just isn't possible now.
You have to keep in mind that your interest rate has to AVERAGE out over time… ie, if you're fixing at 7% for 5 years, then the variable rate has to average 7% over that period of time. if rates stay below 7% for the first 3.5yrs out of the 5, then hit 7% and then only climb above 7% in the last year, then the average variable rate is going to be less than 7%, therefore you're paying more by fixing.
If rates hit 7% next year, then climb after that, then fixing at 7% is certainly a good idea.It really comes down to where you feel rates are going to go and what you're comfortable with. If the prospect of rates going up is going to keep you up every night with worry, fixing is also a good idea. You may pay more, but maybe the premium is worth it.
I don't think that anyone can say either way if it's the right thing or not, it's the same as asking what a house will be worth in 5 years… you can have an educated guess, but you'll never really know.
Hope that helps, I know it's not an answer, but may help with the thinking.
FS
Two things to consider:
a. are you going to keep the property for the term of the fixed interest rate
b. what is your worst case scenario for interest rates. Last year interest on variable went up to around 9%. So, if you're borrowing at 5% say your repayments would almost double.
I've decided on my borrowings to lock in 2/3rds for 3 years and have 1/3 variable. If interest rates don't move then over a year it will cost me $5K. Cheap insurance considering how volatile interest rates were at the beginning of 2008.
If variable goes up 1% it will cost me $1K over a year. If variable goes up 3%, then over 12 months I will save $5K. My other strategy is to put as much as possible into an offset for my variable.
Am I right to fix? I don't know. Can I sleep at night by fixing? Definitely
Need to consider, if you wish to sell the property during the period of the fixed loan you will be up for break fees, which can be thousands .
When you consider that the average 36 months fixed rate is around 125-150bps above the variable rate.
This means you need to see 6 x 25bps increases just to meet the fixed rate level. You actually need 12 x 25bps increases to break even. That is 6 below and 6 above.
Need to ask yourself are we going to see 12 interest rate increases over the next 36 months that is 1 every 3 months.
Remember lenders dont offer fixed rate loans for your benefit or to make a loss.
Richard Taylor | Australia's leading private lender
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