Fixed rate in slow market?

I have an IP in Darwin which I owe $445K on. LVR is sitting around 100%, and my investment loan is with CBA, at 4.8%, P&I.

I saw a mortgage broker today who advised a switch to a fixed rate loan for 2 years on 3.99%.

The savings with the switch add up to around $2k per year (not counting any switching and/or rate lock fees applicable, if any).

Now with the $4k saving over 2 years it looks to be a no brainer. But my concern is that with the Darwin economic outlook continuing to be gloomy, the possibility of a redundancy at work, or of tenants vacating (or heavens forbid, both at the same time) are real. In which case a forced sale might ensue and with a fixed rate, a hefty ERA or break fee might apply.

I know I’m being paranoid, but I know a few people who’ve been forced to sell in the last 18 months when their plan was to hold long term. (And we all think it won’t happen to us, until it does.)

So with this in mind,

Should I:

A)Stick with the status quo (broker said he could get me down to 4.6% even with current LVR, no issues)

B)Bite the bullet and go for the fixed rate of 3.99% for 2 years?

C)Go for a happy medium of a fixed rate of 1 year, at 4.2%?

Any thoughts appreciates. Many thanks.

 

Do you have any intention to sell the property in the near future? Because if you have, or are forced to, then best to stick with variable.

If you're not selling then with option B, you may encounter some challenges given your LVR is sitting at 100%. Nowadays lenders only take up to 90% LVR max for investment loan (including LMI), so you may be forced to pay the LVR down to about 88% then you will be able to proceed with the refi. Keeping in mind you'll be paying LMI again (although capitalized onto the loan), so just need to be mindful these additional cost on top of the refi cost which may not work out the best.

Depending on how much cash you currently have, perhaps do a split loan - having a portion fixed and the other variable so to get the best of both worlds. My video on fixed rate could potentially guide you a bit on how much to fix balancing your cash resource:


Cheers,
David

 

Hey David, thanks for the thoughts!

My plan at the moment is to hold for the long term, but there’s a lot of uncertainty in Darwin at the moment... so I just don’t know

Leaning towards 4.2%, fixed for a year. The lowest CBA will go with variable is 4.6%, I suspect cos of the high LVR.

 

You don't think that the RBA is going to cut rates later this year?

Id also want to make sure you had ALL costs involved in paying out your current mortgage/switching over to the new one.

Lastly......how can you not know what your plans are for the next 2 years.....? I always sign 5 year fixed rates ehrn rates are low (eg last mortgage I reset was over 2 years ago and most where done in the years before that when rates were low).

Have some portion as variable so you can do offsets etc.....but anyone not fixed at the moment needs to look at why.

 

Thanks Dean. The RBA may lower rates but this doesn’t guarantee that CBA will pass these cuts on though?

My plans are to hold, but there’s a lot of uncertainty in Darwin at the moment. Don’t know whether to go for the much lower fixed rate, or stay with variable and just not stress about it.

Going fixed at 3.99% would mean that I save $4k over 2 years, but if I’m forced to sell during the 2 years and interest rates drop in that time, then the exit costs will be high.

 

I guess like a lot of things in life, you just have to make a call based on your understanding of Darwin and then stick with the decision to move forward. Either:
1. Don't believe Darwin's situation is going to improve so better bite and bullet and get rid of it, perhaps take a hit on the loss and can free up your serviceability to invest somewhere else
2. Still has some hope in Darwin so keep on holding for long term. Short term wise, fix a portion of loan so you can minimize ongoing repayment

Just on another note, what about the option of finding out if you do fix for 2 years @ 3.99% and are forced to sell, then what the approx. penalty cost will be?

Cheers,
David

 

3. Do nothing.

 

How much profit are you making on the property ?
If you are keeping a half to two thirds of the net rent then I would keep the property and fix the loan.

 

Appreciate the advice David!

Leaning towards fixing for a year at 4.2% which would be a saving of $1,200 in interest (compared to the variable 4.6%). I’m pretty confident I can manage to hold onto the property for 12 months should things go pear shaped in the worst way possible.

But hypothetically, if I went for the 3.99% for 2 years and I’m forced to sell after 1 year, and the RBA cuts rates twice in that year (0.25x2), then the ERA would be as follows:

Loan amount (assuming $8K of principal is repaid after a year) would be $435,000.

The ERA for that 1 year would be: 0.5% x $435,000 = $2,175, plus any admin fees.

Do you know if that's correct?

Really want to stick with #2 and hold on to this IP. It’d be logical to just cut and run as the prospect of CG is very low in the near future. But if I do sell, it’d be at a loss of $100K, which was my savings that took all of my 20s to build up, and I just don’t think I could

 

Ain't that the truth!

 

@Beano There is no profit. Tenants pay the interest and most expenses, I pay the principal.

 

A little update: I ended up fixing the rate for 1 year at 4.14%. This is an IP loan with CBA’s “wealth package”.

Since the offset account got made redundant with a fixed loan, I’ve moved the funds in there into an ING Savings Maximiser account, currently offering 2.8% (if you deposit $1k minimum monthly into an ING transaction account.)

 

If you are going to fix rates it should ideally be fixed for a number of years not one. More 3 or even 5.

As for rates, I expect we may see two cuts by September from the RBA. But what banks pass on could be another story.

Personally, I would probably stay on variable until around October. Then reconsider things then. And when the time does come , consider at least a three year term or possibly five.

Theoretically rates cannot go much lower, and have more room to the upside. So fixing your rates at the lowest levels on record is not such a bad idea. It lets you know exactly where you stand for the next few years at least.

But I would be waiting a little longer yet.

Good luck.

 

Over the long term, it's always better to have your rate variable. Think of it this way, you're paying your bank extra to take on interest rate risk, and they charge you for it. Also, there's a decent chance of one or maybe two rate cuts. There's no harm in waiting

 

Good to revisit in a year's time to assess Darwin's prospects and decide where to go from there. Good luck

Cheers,
David