I am currently constructing and likely finish in 5 months time. I was advised by the broker to keep everything variable until the construction finishes. I have separate loan for land and construction. I have 80% LVR and currently paying 2.5% on my loan. Since there is likely to be a rate increase I am wondering if I should fix my loan. The bank is offering 2.99% for 1 year fixed and 3.5% for 2 years fixed. Not sure what should I do?
You can't fix the construction loan, only the land loan. If you're currently paying 2.5%, it will probably be 2.75% by next week. Rates only need to go up by 0.5% over the next year for the 1 year fixed rate to break even (rate must be 3.25% or more by the end of the fixed period). Given the RBA has signaled several additional rate increases this seems like a good deal. For the 2 year fixed to break even, rates will need to increase by 1.5% over the next 2 years (finish at 4.25% or higher). In either scenario, I'm assuming rates increase in a linear manner. The question is how fast will rates increase and by how much?
"It will probably be 2.75% by next week?" why do you think so? I think it depends on how fast it goes to .5%. Hypothetically speaking, If it goes .5% up towards the end of the fixed term, I don't think it will break even. I think fixed is beneficial if the variable goes significantly beyond 2.9% during the fixed term?
You generally cannot fix a construction loan if it was packaged up as house and land. But if the land was separate you maybe able to do so. 3.5% for 2 years maybe ok...but I would say go with 2.9% for 1 year which you will probably be ahead by in the next month or so way things are going. At 3.5% the breakeven point could be a couple months away....
so you would be paying more interest to fix, until rate a rate rise comes - although that 2.5% prob doesn't include this weeks rate rise? See my tip on how fixing can cost you more even if rates jump
No, it does not include this week's rate rise. If you don't mind, please can you point me to the tip? I couldn't find it.
Because yesterday the RBA increased rates by 0.25% which will become effective next week in most cases. If you're paying 2.5% today, next week you'll be paying 2.75%. The way the RBA is talking, and based on other indicators (such as fixed rates), I suspect we'll see more than 0.5% this year.
Loan Tip: How a Fixed Loan can Cost you more Interest even when Variable goes Higher than Fixed Loan Tip: How a Fixed Loan can Cost you more Interest even when Variable goes Higher than Fixed
Typically, over the last 20 years or so, variables have been a lower cost overall than middle to long term fixed rates, except for times of cheap Fed Gov Bonds ( think GFC and the last 2 years). Bond issuers ( the stuff the banks buy and mark up) do this punt work on a daily basis, and for an individual to get it right most of the time is unlikely. To us, fixed rates are a risk management plan, not a play on rate cost. ta rolf
Everyone knows variable is going up, but I can tell you that CBA will be increasing its fixed rates on Monday or Tuesday. So if you’re going to fix, do it right now.
