Poll - 10 Year Fixed Rate 2.75%

Who would take a 2.75% fixed rate for 10 years, Interest Only ?

 

Absolutely if based on today's IR environment!

But if we reach Japan status, 2.75 is too high

 

I would take it! Thinking back to 1st year macroeconomics the nominal interest rate (2.75%) should approximately equal the inflation rate (RBA targets 2-3%) + the real interest rate.

Worst case, if the RBA does its job, you are paying a real interest rate of 0.75%. Inflation would have to to <0.5% for this to end badly, which is unlikely.

 

I'd want to know which lender was offering it. I'd have no concerns about the rate being cheap over the timeframe, my question would be around if committing to that lender for that time is a good strategic move.

 

Tough one! Some maths*:

Let's take a 400k loan which at 2.75% IO is roughly $915 per month.
So we are committing to $110,000 over the 10 years.

Now let's compare that to say 4.2% which is a ball-park gong figure in today's rates.
Which if IR's did not move it would cost $1,400 per month.

So over 10 years if it didn't need to be broken and assuming nothing in offset accounts then the net difference would be $58,200

So the question would be on a loan of that size would you be willing to gamble on IR's lowering and losing all flexbility? If something happened and you needed to sell, you could be in all sorts of trouble.
Versus this massive saving and a potential added benefit of IR's rising.

I originally voted option3 but running the numbers and given my loan is higher then I would have to say Yes I would snap it up quick smart. I have a decent cash buffer though which could get me out of break trouble I believe if it were required.

* This assumes a lot, unknown which bank, features.etc. For example If option1 didn't have an offset I would sing a different tune.

 

Assume it's widely available at most lenders . This isn't about semantics of which lender etc . It's about whether a widely available 2.75% 10 year rate would be a value add to your portfolio and strategy, or not ?

 

if break costs were guaranteed to be less than 10K?

 

The cash rate would need to drop to near 0% for rates to be 2.75%. On a money saving deal it's probably a good bet, but from a cash flow perspective, it's a very compelling deal. This virtually guarantees strong cash flow for a decade. In a country with a growing population that would almost certainly print money as long as the property was in a location that's not going backwards.

 

What is the point of this thread? Are you predicting such rates in Australia in future?

What is the reason you picked 2.75% and 10years timeframe?. Bit of context would make this exercise more interesting.

Cheers,
Oracle.

 

Yes. Assuming it's with the majors with the usual advantages. As I can't see the cash rate ever being zero (or close to) for the IR to be 2.75, I think it would be a no brainer. Of course what you use the funds for may determine how effective such a low rate is. If your property goes nowhere then it was a poor use of the funds. If it's a low yield/high growth property the maximum benefit will be seen as you can ride the growth wave without the usual price of high/er holding costs.

 

What I am saying is even if the break costs were above that 10k I would definitely still consider it for my PPOR, set and forget.

 

Maybe a trick question. I am waiting for a strategy (over 10 years) wherein, the calculus effectively reduces the rate to 2.75%

 

He will reveal to you that you can get these rates

but...

Spoiler

Only with NRAS!

 

Makes a lot of sense @Biz.

Glad I added the little caveat in my last post of a good property in a location that's not going backwards...

 

Just seeking thoughts. These deals are currently available in the UK...technically Australian banks could offer them here... it's of interest to me to understand at what point long term fixed rates become attractive to investors in Australia.

 

This has nothing to do with NRAS Im afraid.

No.. but I do have a 10 year strategy whereby a 30 year non deductible mortgage can be reduced by 12-17 years, borrowing capacity can be significantly increased and a far larger portfolio can be built. But this poll is unrelated.

 

Was just kidding mate, love your work.

 

I would be keen to snap this up for a portion of my loans (~40-60%).

A portion would need to stay variable to allow for flexibility within the portfolio.

 

Look forward to it maybe as a link or a PM.
BTW I find your posts on NRAS and Basel quite educative.

 

@Skilled_Migrant it's purely a hypothetical scenario

Low home loan rates and house price bubbles. How close is the connection?