When is the right time to fix your loan?

Hi everyone, I'm a long time reader and fan - this is my first post to this awesome forum.

I wanted to get a gauge of when is the right to fix your home loans.
I currently own two IP's in Sydney - both loans are variable.
It isn't a big secret that rates will be due to increase and continue increasing over time. At this stage the rises in rates have been brought on by the banks.

Last Friday we saw CBA increase their fixed loan rate by up to 0.5% on a number of fixed mortgage loans. These sorts of increases make me wonder whether its worth having both of my IP's on Variable rates. With time, I am sure we will see more increases from the other banks.

It makes sense to me to consider fixing one of my loans (the one that returns higher net yield) and keeping the other on a variable rate while any built up $$ in my savings can offset this loan. Both IPs are currently on 4.33%(with CBA). The only issue I have at this point in time is that the fixed rates are higher than the variable since the recent change.

When does it make sense to lock in our variable rates to a fixed rate.
Would love to hear your thoughts and opinions.
Thanks

 

I would say we are at the bottom and on the rise or stay flat in regards interest rates. I would fix now and make sure you have a variable component to offset any current and future savings assuming you dont have a PPOR, if yes then offset that first.

 

Westpac just hiked I/O fixed rates as well...

 

Thanks for your input @Colin Rice, I probably should have also mentioned that I am currently closing a deal for another IP. So would I want to also fix this new loan too?
My strategy at this point in nothing too complex - buy and hold at this stage.
I do not have a PPOR.

@euro73 The banks are marching towards more profits

 

If you need/want predictable repayments over a set time period then not a bad idea. Dont want to advise definitively without knowing the full picture.

 

As @Rolf Latham said, know your path and whether you need/want to sell any which may determine whether you fix or not. You could fix one and keep 1 variable so you can put additional funds against that IP and/or sell if you need to.

 

No one can put their hand on heart and honestly answer this unless they can predict the future.

Their were signs of the Investment and IO Loan increases but you still can't necessarily pat yourself on the back just yet if you fixed for 5 years as their are still 4-5 years to play out.

Ask any broker here how the lending landscape was in 2013.....

 

You may be aware but there can be hefty break fees if the loan is canceled mid term, hence the comments to be sure you won't need to sell. That said I have gone for 5 years just to make it worthwhile (hopefully).

 

Thanks to all for your comments, the path seems clear to me at this stage and makes sense to do the following:
- Keep my Sydney house (IP) on variable rate. This is my largest loan and also is the one that returns the least yield. I can then offset this loan with my savings to minimise the interest component of the loan. It also leaves me flexibility to re-finance.
- Change my Sydney apartment (IP) to be fixed (potentially for either 2, 3 or 5 years, depending on rates). I have already released the equity in this property and I plan to hold it long term.
- New property that I am currently in the middle of acquiring - Keep it variable at this stage so that I can do slight renovations and re-evaluate to (hopefully) release any equity gained. Once this has been done, lock it in to a fixed rate - similar to my Sydney apartment.

Is my reasoning and thoughts logical on this? I understand it all depends on many factors and considerations, however I see the rates to be still very low. So even if the variable rate was to drop lower than the current fixed rates of banks, I would still be quite comfortable and without any major loss.

 

Depends on what you want to do, fixed rates is more for certainty. For example Westpac just decreased their fixed rate for 2 years on both owner occ and investment loans to 3.88%, only catch is it has to be P&I. So these rates go up and down all the time, just depends on the banks appetite, and its hard to pick the "bottom".

 

Seems logical enough - just one note re; the equity release property. If you're releasing equity via the same lender, there is no impact in fixing your loan and then releasing equity thereafter - it's just a normal equity release split.

 

@Corey Batt
I didn't know that - I had always assumed that fixing a loan directly impacts the ability to release equity on that property and therefore thought this all had to be done before fixing the loan.
Thanks for clarifying

 

It's a very common misconception - but in the end you can just add as many loans as you like to the security so it doesn't become a real issue.

The only thing to note is sometimes people will then shop around for valuations post renovation to see which lender gives the best result (at which point you'd want to be variable to avoid any potential break fees) - there's usually not a huge variance if renovated recently after settlement and many lenders use the same valuation firms/panels so there will be overlap.

 

Totally understand this one, when I released equity from my apartment, there was up to 40k difference in the valuations between some banks.

 

When you can't sleep at night.

If you are trying to game the banks, get a better rate, it's when fixed rates start moving up. Which looks a lot like now, since Donald was elected.

Will it prove to be the right decision over the term of the fixed rate? Hard to say, but I'd wager there hasn't been many investors who fixed in the last ten years (since the initial flush of cheap money after the gfc) or so that are 'in the money'.

 

I fixed 70% of my loans for 3.79-3.89% last Oct/Nov...if I break now...it is unlikely I will wear a penalty on the 2-3 fixed rates.

 

You got a good rate Sash, I guess low LVR, not IO, with major/s ?

I think there should be a discussion on breaking, my thinking is no matter what term, 2, 3 or 5, if rates are higher than when you fixed, breaking should not be much compared to say 1% cheaper, but I really have no idea nor see any good writing on breaking fixed loans.

 

I do not think waiting till you lose sleep is a good idea.

From where I stand, what I see, which is only a logical outlook (that could be totally incorrect) the banks themselves & all of them, are betting on later years being higher, it would seem that many of them think for the next 2-3 years rates will do the same thing, near all have higher rate for 4 or 5 yr.

My thinking may be broken though, as I have never watched really how they price fixed loans, maybe they always do it this way, even on the way down ?

Either way, if most of the action is this year and next, having stable payments for 5 years has appeal.

 

Indeed. Banks are betting that way now.

But will their bets be the same next year? In 2 years time? It's great getting a cheap fixed rate, but defining cheap is hard to do until the end of the fixed rate term.

And as above, I don't think there are many over the past decade or so that have come out in the money.

Note, it's fairly common for shorter term rates to be lower the longer term. It's the nature of risk, estimstung further out is harder, therefore more expensive.