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Questions on fixed rate loans

Discussion in 'Property Finance' started by Peter P, 5th Jan, 2017.

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  1. Peter P

    Peter P Well-Known Member

    Joined:
    17th Apr, 2016
    Posts:
    107
    Location:
    NSW
    Hi,

    I'm assessing whether it's worthwhile fixing my loans for 2 years with NAB and wanted to understand any future consequences.

    Some have mentioned that in the long-term, variable rates are always lower than fixed rate loans.

    1) John has a 600K loan on variable interest I/O. He is currently receiving a discount of x% discount off this variable rate. He fixes the rate of 50% of the loan (Loan A) and leaves the other 50% on the current variable rate (Loan B). When Loan A's fixed term ends, the rate would revert back to a variable rate. Would this variable rate be the same rate as Loan B (with the x% discount)?

    Here are some responses:
    Lender 1: No, you would have to renegotiate a new variable rate on Loan A
    Lender 2: Yes. Show the bank you have proof of the x% discount on Loan B and you should be able to receive the same discount on Loan A when it comes off the fixed term.

    Which lender should I be listening to?

    2) Does anyone have a method of calculating/deciding how much loan portion you should fix? Some people choose 50/50 but I'm not entirely sure why.

    Here's an idea: Say John has 100k in cash savings and he knows he can save 30k a year. Therefore, for a 2yr fixed rate term, he should keep 160K of loan on variable and the rest fixed.

    Any other ways to do this?

    3) I understand that if I leave my loans at I/O variable rates, I can keep the I/O period up to 15 years (without refinance). Does fixing the loan have an impact on my I/O period?
     
  2. euro73

    euro73 Well-Known Member Business Member

    Joined:
    18th Jun, 2015
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    Location:
    Sydney
    Generally the discount should apply to the entire loan amount, and when a fixed term expires you should see consistency applied to the variable rate you pay for A and B. However, in 2 years, you'll be subject to the policy of the day...whatever they may be. They may do exactly what they have promised, or they may make you jump through hoops... Part of building a portfolio is being pragmatic about having to deal with lender policy changes and inconsistency every now and then... and being willing to refinance if required.

    Generally just to hedge, or if they want somewhere to park surplus funds, and have already maxed out their PPOR offset or dont have any PPOR debt to offset. I personally believe 3 and 4 year fixed rates are compelling ( at NAB in particular) for investors at the moment ... especially those who still have PPOR debt , and even more especially because lenders have commenced hiking variable rates recently and I think there are probably more to come in 2017, with BASEL IV implementation. If you dont intend to sell, and dont need somewhere to park surplus funds , I think there's plenty of merit in fixing the lot at sub 4%.

    Not at all... assessment rates are assessment rates, no matter what rate you are paying, and no matter the type of loan ( variable of fixed) . I would recommend you double check the 15 year I/O thing.... NAB offers 10 years I/O under some product lines ( tailored loan and choice package) and 5 years I/O under others (homeplus). You can certainly apply to extend the I/O period once the 5 or 10 years expires, but that will be at the discretion of the lender at that time...
     
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  3. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,284
    Location:
    Melbourne, Nationwide
    Q1: Both lenders are saying the same thing, that you need to renegotiate the rate discount again.

    Q2: We tend to do a budget as your example does. How much cash you've got, how much you can save during the fixed loan, plus a bit of a stretch. Leave at least that much variable.

    Q3: NAB can be quirky on this one, they may continue to roll over to new fixed loans until the end of the IO period unless you do something about it. Outside of this, no consequence that I can think of.


    I don't see much point in the 2 year fixed rate at NAB. I'm thinking the 4 year fixed is the best value at the moment, but the 3 year rate's pretty good too.
     
    Last edited: 6th Jan, 2017
    Peter P likes this.