With interest rates at historic lows and talk of rates rising in the next year or so, borrowers are once again pondering that age-old question about their property investment or home loan– to fix, or not to fix?
Fixing all or a portion of your property investment mortgage (or home loan) is enticing right now given that some of the fixed rates on offer have a 4 in front of them and a few banks have their fixed rates below their variable rates.
So will it get better, or should borrowers pounce on these fixed rate deals before lenders do an about face?
While it would be nice to have a definitive answer to that question, unfortunately I do not possess a crystal ball!
Trying to pinpoint the bottom of the bank’s interest rate cycle is almost as difficult as identifying when property markets have hit their lowest point.
Only with the help of hindsight will we ever truly know when the best time to fix property investment or home loans is!
Michael Yardney recently wrote a blog outlining the..
- Will I want to sell my property during the fixed loan period?
- Will I want to access the equity in my property to invest further during the fixed period?
- Do I need an offset account?
- Can I make extra repayments off my loan?
- What balance of fixed and variable rates do I need for my portfolio?
- How long should I fix my loan for?
- If interest rates fall further, what will locking in today have cost me?
For my money, fixing all of your loans is never a good idea, regardless of how tempting the percentages might be at any given time.
While having the security of knowing what your repayments will be for the next few years can give borrowers some peace of mind in these uncertain times, if you do this changing the structure of your loan portfolio; refinancing or swapping lenders to benefit from a better deal, can be a tricky and costly exercise if you have to break a fixed loan term to do so.
Why not fix a portion?
Keeping a portion of your loans variable and fixing the remainder is worthwhile if you want to protect your cashflow, but this advice does come with a word of caution.
Firstly, avoid fixing multiple loans all at the same time and for the same period, because when they all revert back to a variable rate at the same point it can cause a lot of headaches; particularly for investors who have come to rely on the cashflow certainty of a fixed rate.
Secondly, whenever you fix your property loan(s), you are taking a calculated risk.
Over the years some of our clients who fix their loans do benefit financially in the long run. However I’ve seen more lose out when they fix their loans,even though at the time rates seem low.
The world’s economic outlook is incredibly difficult to predict right now. No one can say for sure where overseas financial markets are headed and even Australia’s enviable economic stability has wavered a bit of late.
Then there’s the fact that the banks are conditioning borrowers with constant talk about the rising cost of funds putting pressure on their ability to drop interest rates in line with any future cuts from the Reserve Bank.
Most economists are expecting interest rates to increase in the next year or two. In fact a recent survey of 28 economists concluded that interest rates are likely to start rising in 2015 and then continue to increase for 3 years.
So maybe that piece of string is not as long as we think…maybe fixing a portion of your loans is worth giving some thought to sooner rather than later!
But before you make a firm decision, have a chat with a proficient finance broker