Lock it in or to not lock it in that is the question?

Hi Guys,

I fixed my ppr three years ago with cba and it comes to an end in June next year.

This year I have bought two properties one in Bowral (fixed for 5 yrs at 4.38%) and one in Fitzgibbon qld (cba variable). I am going to buy another in the next month as well and just trying to work out if I should lock the Fitzgibbon property in along with the new one?

I am new to this so any help would be very much appreciated.

Kind regards,

Ben

 

Fixing your rates might be cheaper over the next few years, it might not be. Very hard to predict, but overall I don't think you'd be too disappointed in the decision from a financial perspective.

The main disadvantage of fixed rates is you loose flexibility. If you need to move the property to a different lender or sell the property, the break costs could be substantial.

Whilst you can structure loans to access equity without breaking a fixed rate contract, if the current lender won't accommodate the equity release (perhaps due to their policy of the day or their serviceability no longer works), you'd be forced to move lenders if you want that equity released.

Personally I prefer only to fix properties where I don't anticipate changing anything financially with them during the fixed period.

 

Legend Peter, much appreciated!

 

Keep in mind with the banks putting in a rate increase over the flat RBA rate, it is highly likely that the RBA will put through a rate cut in the coming months to bring the banks rates back down to where they were before the increases.

I am not considering fixing but if I were, I would look at it after the next round of changes.

 

Banks let you lock interest rates because they know better than you and most times they profit from customers locking their rates else bank won't even offer this facility.

Think of this as high price insurance and only use if an interest rate hike would otherwise push you to the very brink.

 

As I have shared before, I locked in an IP loan a bit over a year ago @ 4.99% (St George), obviously, I am 'out of the money ' on this one.

In hindsight, waiting a year longer would have resulted in a better rate.

I locked in a bit because I wanted insurance against rate rises but having said that, any rate rises would not (within reason) have caused even a minor financial discomfort.

The property is a quality property in Sydney and one that I will ever sell regardless of the state of the property market. At 4.99% I can be confident in not needing to raise rents as my tenants are a great family, the property is cash flow positive but with depreciation benefits, negatively geared - the sweet spot for me.

At the end of the fixed loan I will probably move my business to another institution if I see one that acts with consistency and decency towards their clients in this 'new world '.

This institution will get my business If I decide to buy another Sydney investment property in the next few years.

I am happy to forget about this property for the next few years and get on with other things in life. The fixed rates, for me, makes this quite easy.

regards

 

Ben, Peter's advice is really good. If you in any chance want to pull out equity and that bank wont let you, you'll have to break your fixed term. You might not think you'll go down this path, but you could surprise yourself. I did.

This is not actually correct. I'm not an expert on this but the bank gets its funding for fixed term mortgages from a different lending source. They set the fixed rates based on this wholesale funding. The wholesale funding market is different to the source of funding for variable mortgages. And simply some people want a fixed term mortgage so they offer it.
Note that break fees etc are really there to cover the bank's costs because they then have to refinance their loan at whatever is the current market bank bill swap rates. But most of the time you'll break at a time that will mean you incur expenses.

Sorry this is a NZ reference but same applies for Australia

http://milfordasset.com/cost-of-funding-lets-australian-banks-off-hook/

 

Unless the banks don't pass on those rate cuts..

 

They would be stupid not to really, the media would have a field day that a) they increased without the RBA increasing then when the RBA lowers to bring it back down, they don't pass it on.

It's not guaranteed that they will pass it on but it wouldn't be good business for them not to.