Join Australia's most dynamic and respected property investment community

Fixed rate or variable for IP?

Discussion in 'Property Finance' started by Esel, 29th Jan, 2016.

  1. Esel

    Esel Well-Known Member

    Joined:
    4th Aug, 2015
    Posts:
    405
    Location:
    Melbourne
    Just reading another thread about interest rates. Most people seem to have variable loans.

    I have been advised to fix an IO loan for 5 years at 4.8% mainly just to remove any uncertainty or stress.

    What's everyone else doing and why?
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,781
    Location:
    Perth WA
    5 years is a long time to fix - I don't think anyone can plan accurately what the future hold that far in advance, which leaves you open to the risk that if you need to sell or refinance for whatever reason it could be very expensive.

    What kind of stress are you under now? Or what are you concerned about in the future? If nothing, don't fix. If there's a real risk of rate rises hurting your ability to repay, it could be worth considering.
     
    Peter P and Esel like this.
  3. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,159
    Location:
    Canberra and Sydney
    It's too long IMO.

    If you need to break that loan - it could be costly.

    You can kind of plan ahead for 2 or 3 years - but 5 is stretching it.

    Cheers

    Jamie
     
    Esel likes this.
  4. Redom

    Redom Mortgage Broker Business Member

    Joined:
    18th Jun, 2015
    Posts:
    863
    Location:
    Sydney (West) and Canberra
    In my opinion, fixing for longer than 1-2 years should never really be about the price alone. Its about risk management and flexibility.

    Fixing limits your flexibility to release equity, so if you have plans for future investing over the period, having some of the portfolio variable can add layers of flexibility to release equity.

    For example, you could have fixed with AMP on a property that has increased in value. Them leaving the market for 6 months would mean you'd need to break that loan to simply release some equity.

    If your sub 80%, there's additional flexibility as you can valuer shop and move to the bank that gives you the most equity out.

    On the upside, having a portion of a large portfolio fixed for that term does reduce some interest rate exposure for a period of time.
     
    Rclank1422 and Esel like this.
  5. tobe

    tobe Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    897
    Location:
    Melbourne
    fixing is a form of insurance. If you have a whole lot of fixed costs, like a PPOR mortgage, kids, car loans etc, then perhaps look at fixing (but as others have said, perhaps not for 5 years). If you don't have a lot of these fixed costs, or your income has the potential to grow, then perhaps take out other forms of insurance instead. landlord insurance, income protection/loan protection insurance etc.

    The best form of insurance is having money in the offset account. If you are able to, borrow 12 months of repayments and sit them in the loan or offset. That way if there's any vacancies, or repairs, or if you lose your income for a time, you have more time to sort it out.
     
    Esel, legallyblonde and Redom like this.
  6. albanga

    albanga Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    1,117
    Location:
    Melbourne
    Who "advised" you would be my question? If a bank it makes sense, it's there way of locking you in with them for a long time and if you leave would have drastic break costs.

    If a broker, consider a new one. IMO any broker "advising" a client to fix for 5 is either A-A prophet who can see the future, or B-Someone trying to protect there loan book with clients locked into ridiculous long fixed terms with no get out options.
    I'll take a punt at which one it will likely be.
     
    Peter P, Jess Peletier and Terry_w like this.
  7. Esel

    Esel Well-Known Member

    Joined:
    4th Aug, 2015
    Posts:
    405
    Location:
    Melbourne
    Interesting @albanga. It was a broker (hes our accountant/tax advisor, Fin Planner also). I think his approach is fairly conservative.
     
  8. Esel

    Esel Well-Known Member

    Joined:
    4th Aug, 2015
    Posts:
    405
    Location:
    Melbourne
    We do have a sizable PPOR debt and kids but im going back to work next year so we expect our income to grow. I like the offset tip.
     
    tobe likes this.
  9. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    4,942
    Location:
    Sydney
    What's your goals? Are you happy with just 1 or 2 IPs or do you want several?

    If its several, I'd ask him, how many clients he works with that have a sizeable property portfolio. And how many IPs he has himself.
     
    Esel likes this.
  10. Esel

    Esel Well-Known Member

    Joined:
    4th Aug, 2015
    Posts:
    405
    Location:
    Melbourne
    IM not expecting much equity in the next 5 years on the IP. But we have a lot of equity in our PPoR which is on a variable loan. This is our first IP so its not a large portfolio but it will probably end up being a lot of debt for our income.

    After reading all of the great advice, i think we are leaning towards a variable rate because we are expecting our income to increase in the next 5 years.
     
  11. Esel

    Esel Well-Known Member

    Joined:
    4th Aug, 2015
    Posts:
    405
    Location:
    Melbourne
    Do people really walk into someones office and ask how big their portfolio is!?its a bit brash for my british sensibilities. :oops:

    Initially, we only wanted a couple of properties to hold, so we could help the kids if they need it in the future. We certainly dont want to compromise or risk our current lifestyle.
     
  12. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    4,942
    Location:
    Sydney
    Hey, he's your financial planner....
     
  13. Tim & Chrissy

    Tim & Chrissy Well-Known Member

    Joined:
    5th Dec, 2015
    Posts:
    813
    Location:
    NSW
    It sounds like you are thinking about the fixed rate as a type of risk mitigation strategy. Have you considered any other options for risk mitigation?

    Off the top of my head:
    * Income protection insurance,
    * Refinancing PPOR and parking excess in a 100% offset account for a rainy day,
    * Looking at the hardship provisions in the loan you are applying for.
     
    Esel likes this.
  14. Esel

    Esel Well-Known Member

    Joined:
    4th Aug, 2015
    Posts:
    405
    Location:
    Melbourne
    I hadnt, until i read this thread.
     
    Tim & Chrissy likes this.
  15. Hodor

    Hodor Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    745
    Location:
    Homeless
    I have some fixed and some variable. One loan I fixed for 5 years. I have long term plans and other properties for flexibility.

    You do need to consider the pros and cons however.
     
  16. Befuddled

    Befuddled Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    251
    Location:
    Sydney
    Isn't there a conflict of interest there?

    Puts on the fin planner/tax advisor hat on and tells you to buy an IP
    Puts on the broker hat on and sources you loans.
    Puts on the accountant hat and does your taxes.
    Makes financial advice. commission and accounting fees
     
    Gockie likes this.
  17. MC1

    MC1 Active Member

    Joined:
    23rd Jun, 2015
    Posts:
    27
    Location:
    Melbourne
    Broking is a full time Job ... Where they find time to be accountants, tax advisors/ Planners/ Hair dressers ...... beats me
     
    tobe likes this.
  18. Omnidragon

    Omnidragon Well-Known Member

    Joined:
    17th Oct, 2015
    Posts:
    414
    Location:
    Victoria
    Sounds pretty long
     
  19. Esel

    Esel Well-Known Member

    Joined:
    4th Aug, 2015
    Posts:
    405
    Location:
    Melbourne
    Maybe. This particular firm of accountants are clear on their website that they have a focus on property which is what we were looking for. We had spoken to other FPlanners previously but they weren't keen on property so we didnt proceed with them.
     
    tobe likes this.
  20. Esel

    Esel Well-Known Member

    Joined:
    4th Aug, 2015
    Posts:
    405
    Location:
    Melbourne
    Is it unusual for an accountant to arrange finance for loans? it seems like a really logical, convenient service to me and it suits us and has been really helpful.