3.88% Fixed for 2 years P & I with NAB - Seems like a good rate?

Had a call from NAB today – offered me 3.88% P & I, to fix for 2 years with my 2 loans, on a $395 wealth package, $395 fee waived for the 1st year (no $10/month per loan fee or $90/year credit card fee). No re-application process with providing employment or income history – just a simple switchover.

Otherwise, the I/O rate after 18th Sept when the fixed period is up, is 5.2% variable P & I or 5.65% variable.

Seems a good rate and I doubt interest rates will move downwards much below 3.88% in the next 2 years. Thoughts?

IPs will be kept at least for the next 2 years.

 

Westpac had the same recently. It's decent.

On an approximate loan of $370k odd, we found one of our clients would have paid $1,755 per month vs.$1,710 per month on 5.5% IO with Westpac.

Result was over 2 years the principal would be down by $14k odd reverse compounding. So definitely worth a consideration.

 

Agreed. I can't lay my hands on the transcript as yet but according to this article:

RBA Governor Philip Lowe told parliament on Friday he expects the next move in interest rates will be up, but not for some time yet. Financial markets are betting the hike will come in mid-2018, with some economists saying the period of no change in interest rates will extend well into 2019.

 

On the face of it, it's a no brainer BUT - you need to carefully consider what comes next. Are you done buying? What's your current servicing like? Can you change back to IO later?

Changing to P&I will affect your ability to keep buying and you may not be able to change back so make sure you're thinking about all the considerations.

Also, bear in mind no offset against fixed, no flexibility and so on.

 

Cheers Jess. Will be buying into the future - PPOR will be next purchase. OK for Principal to be paid off into the future. Yes, I saw the no offset issue, but OK for me.

 

I'd say otherwise the variable rates would be able to be negotiated down reasonably if you have over 250k borrowings.

Have a chat with your broker to find out the impacts of your loan going P&I and whether this might reduce your ability to purchase the PPOR in the future. Last thing you want to do is make a change which precludes you from that next step - when you could otherwise just stay IO until you've made the PPOR purchase and make changes after that time.

 

Really important you get your servicing checked for the PPOR prior to changing - if it won't service with P&I payments with a normal lender, I'd stay IO for the time being.

 

Can't agree more with @Jess Peletier and @Corey Batt , if you are not buying anymore, and come to the stage of consolidating debts, then go for the lower rate with p&i by all means. If you still want to buy more , then think again, because once you turn it into p&i, after a few more purchases, the likelihood of going back to IO is very very low. Then you might face a increased pressure on cash flow.

 

Just trying to understand why going P&I for 2 years will hinder going back to IO later? With P&I you are reducing your principle, so wouldn't it be easier to refinance to IO with the same or another bank?

 

No - if your servicing is strong, sure, but if you've bought in the interim you may no longer qualify with your lender. Many will require a full application for this and a lot of property investors will no longer service.

 

Does this apply more to people who have built large portfolios pre-APRA. Someone like me who has only recently started buying would have already had serviceability tested at 7.5% P&I at the time of buying and MAY be ok if there aren't any drastic changes from here? Or do banks test serviceability at an even higher rate if you want IO?

*Sorry to hijack your thread @Beachy. Will let it get back to your question.

 

They stress test it even higher on IO loans- as you have less time to pay back the loan balance (ie you have to pay the whole debt off in 25 years, instead of 30).

People pre-APRA are especially sensitive to these changes, but with any growing portfolio you may make a purchase which you can have the borrowing capacity to complete, but then not have any capacity left to make any adjustments to all of the other properties - leaving you snookered.

 

I signed up / changed one of my IO loans to this deal the other week, and managed to get a slightly better variable rate for my other loans too

 

We are in the process of refinancing to nab right now. Same thinking.

 

Agree...a lot of people a temped to go down the PI and route...without looking at the CF impact.....they don't know how to work the numbers.

Get it wrong...and it could stuff your CF.....

 

agree @sash , cash is the king for any business ( including property investing)

 

We are just 6 weeks into APRA round 2 and already the cracks are starting to appear for some. What will the cracks be like for investors running low yielding, highly geared models in the pursuit of growth at any cost, in the coming months and years? Rather large for that specific category of investor, I would suggest. Those are the kinds of cracks that bring "structures" down.

And here endeth the lesson. Cash cows are king - firstly for their debt reduction capabilities (which by itself has long term compounding benefits) and secondly for their defensive/cover your @ss capabilities, which you'll appreciate down the road when you are forced to P&I on some or all of your investment loans.

 

I am selling my no growth CF properties...and only getting into growth AND income properties.

If it is very high CF (above say 6-7%) ask the question why people? Usually the investment is absolutely rubbish.

 

@sash, its pretty easy for you to take that approach as you've been at this for @ 20 years and have availed yourself of a sustained, ongoing period of easy peasy credit , when borrowing money was easy one day, easier the next, easier again the next etc etc- and for everyone. And for the best part of 25-30 years. You've had the best part of 2 decades for your rental yields to mature. And you've been able to enjoy ready access to I/O finance for long periods. And finally, every million dollars you borrowed as you were accumulating the majority of your assets did not cost you 40-50K of income for servicing like it does now.

I write posts for those a little further down the ladder, trying to get up a few rungs. or them, every dollar they borrow cuts their borrowing capacity by quite a bit, and it does so before they've had the chance to accumulate a large volume of assets , and then P&I comes calling long before they've been able to hold those assets long enough for the rents to mature to a point where they can deal with P&I.

In other words, every advantage you enjoyed (other than negative gearing) is now unavailable to the next generation. They don't get to use "actuals" . They dont get evergeen LOC's or long I/O terms...and even if they did manage to get lucky on that front once, they certainly wont get to extend them over and over. Instead, what they get is P&I cliffs arriving far too soon for their holding costs to be manageable on large portfolios... and seriously reduced borrowing capacity.

Put bluntly, they are working with totally different ingredients to you so I dont think its reasonable that anyone argues they can bake the same cake.

So they need to reduce debt as they accumulate.



PS - I have several properties that offer better than 7% and have grown 40%+ in the last 2 years.

 

I've done the same thing with one of my investment loan. Negotiate and also get the 2nd year of wealth package fee waived....fair enough no offset but from memory they allow upto 20k more in paying principal if you have spare money and want to do that....