Borrow fixed or variable?

We have identified an IP in Melbourne but currently confused, whether to buy fixed @2.49% fixed for 3 yrs or variable? If the cash rate further drops to 0 and if banks pass the rate, will the rate drop below 2.49%? What is your take? Thanks

 

Understand that is a P&I rate?
Do you have owner occupier loan? If so, you may want to consider if P&I is the right type of repayment for you?

 

Yes I have owner P&I on owner occupied for 400k. The idea is to invest into buying land and construct in melb. Will be interest only during construction period and then P&I as we can service this loan comfortably. What would be ur advice, am I missing anything here by not taking interest only loan? Thanks

 

I'll put it out there, I don't think the cash rate is going to go negative. There's a few things the government is doing to avoid this and there's certainly consiquences they don't want.

The real questions you should be asking is why are you considering either fixed or variable? What are the pros and cons of either applying to your circumstances? Have you considered a simple split loan to take advantage of either?

The question of P&I vs I/O depends on a number of factors. In essence, an I/O loan will give you a shorter term cash flow boost, but will cost you more over the life of the loan. It really depends on what is more important to you and how you'll use the money and the investment.

 

Thanks Peter, this helps

 

If this new property will stay as an investment you'll want it to be interest only while you have an owner occupied loan.

This is to maintain it full tax deductions while focusing on paying down your owner occupied as fast as you can since the interest paid on that is non deductible.

Are fixed rates going any lower ? I doubt it since the RBA are focusing on 3-5 year bonds.

 

What Tony said.... focusing on owner occ loan first.

But as Peter said, the interest you pay on the IP due to IO... but generally directing the differential toward owner occ will reduce non tax deductible debt faster.

 

You can have the best of both worlds.

Regards

 

Believe it or nor not, I split them into two loan facilities to diversify the risks a few years ago as fixed rate offers are always lower than those of variable rate in my case.

+The variable rate worked for me as I worked hard and accumulated quite some cash over the years, meaning I paid zero interest for whatever equivalent to the cash amount sitting in my 100% offset account

+Lucky enough, the fixed rate has expired recently when there were massive cuts of the cash rate due to the Wuhan virus. I was able to get a new lower fixed rate.

 

May be 300K fixed @2.49% for 1 year and 100K variable . CBA allows 1 year fixed @ 2.29% for OO. By 2021 June of the rates fall further, then you can fix for 3 years