Loan Tip: Fixing the Main Residence Loan – 3 things Watch out for

Discussion in 'Loans & Mortgage Brokers' started by Terry_w, 7th Sep, 2020.

Join Australia's most dynamic and respected property investment community
  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    There are probably a lot more to consider but 3 of the main things that I see are


    a) Break Costs

    If you fixed at the wrong time you would be paying higher interest now than you can get variable. You could break the loan to get the lower rates, but the break costs will not be deductible on the main residence related debt. With investment debt it would be and this lessens the cost of breaking the loan.


    b) Debt recycling

    It is very difficult to debt recycle when you cannot pay the loan down. A way around this might be to keep some of the loan variable so this split can be used to debt recycle.


    c) Offset Accounts

    I have seen the bizarre situation where borrowers were offsetting investment loans while having non-deductible debt on their main residence which was fixed.

    Only one or 2 lenders offer offset accounts on fixed products. A way around this might be to keep some of the loan variable so this split can be linked to the offset account. But anticipate savings increasing over the period of the loan. You probably don’t want to end up with your cash exceeding the variable loan amount as there is no further benefit when this happens.

    All the other usual tips also apply - rates could drop further too etc.
     
    datto likes this.
  2. barnsey

    barnsey Member

    Joined:
    7th Sep, 2020
    Posts:
    14
    Location:
    Melbourne
    If you fixed the interest rate way back but now you anticipate interest rates will drop below your fixed rate what options do you have to hedge your risk?

    Thinking outside the box I know like in the US you could potentially look at shorting bonds to basically hedge your position. And I know here in Aus our bank stocks basically are the equivalent of the bond market in the us so you could potentially short the bank shares.

    But outside of this, do our banks offer any kind of product/protection for borrowers?
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

    Joined:
    18th Jun, 2015
    Posts:
    41,672
    Location:
    Australia wide
    None that I am aware of.
     
  4. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    23,319
    Location:
    Sydney
    Multiple fixed rate terms eg 1/rd 2yr, 1/3rd 3 yr and 1/3rd variable....Nobody says you must be 100% fixed or 100% variable.

    The benefit of the variable element is that can have a offset and even extra repayments