Is it time to fix for Investors?

Is it time to fix for Investors?
We are now seeing all lenders raise their variable interest only rates for investment loans with major Banks leading the charge. Recently major Banks raised their rates by up to 0.30%, posing the question “Should investors start looking to fix their interest rates for investment loans?”
I will answer this in 2 ways – why you should and why your shouldn’t!

Why you should?

  • Provides insurance and comfort knowing your repayments are fixed
  • You can lock in for up to 5 years which allows you to project a rate of return on your investment
  • There are fixed rates in the 1-3 year fixed space equal or less then the current variable rate
Why you shouldn’t?
  • If you are looking to sell your investment in the shorter term, say 6-18 months, stick to variable and avoid potential early repayment costs
  • If you are likely to pay off some debt and make extra repayments, again stay with variable to avoid additional fee’s
  • There are some lenders offering cheaper interest only and Principal and Interest variable rates then your current big 4 Bank. I recently saved a client $6,000 per annum by refinancing interest only debt from a Major 4 bank.
What is likely to happen? 

These are my current thoughts:

  • Interest rates are likely to remain relatively low in the immediate future.
  • We are seeing a large differential in interest rates between Principal and Interest and Interest Only loans, and this will continue.
  • At a recent industry conference I attended, approximately 40% – 50% of lenders are on Interest Only and the regulators want to get this down to 30%. This will mean more increases in Interest Only Rates.
  • Principal and Interest home and investment loans will remain very attractive and low, as will Commercial Lending rates.
In this month’s Money Magazine in their Real Estate Guide , I am quoted as saying “Traditionally accountants have urged property investors to choose interest-only repayment terms for their loans.
As an investor you can claim only the interest component of only the interest component of the investment mortgage as a deduction. However, we’ve found that with a 30-year principal and interest loan, 15 to 20 years of repayments cover only the interest anyway. By converting to a principal and interest repayment structure for your investment property, you’ll get a lower interest rate and still be able to claim a significant portion of your repayments covering the interest. Moreover, you’ll pay off some capital, which in combination with some capital growth will help give you some equity for the next investment move.”

What does this all mean? You should be looking to pay debt off because at some point in time it will need to be cleared. Considering P&I loan repayment interest rates continue to be at their lowest points in many years, it maybe worth thinking about if you are an investor. However your personal financial circumstances will vary and please consult your accountant, tax advisor, or financial planner for further advice before you proceed.

Remember we are here to help and save you time, money and stress!

Cheers

Tony

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