Interest Rates: Is This a Good Time to Fix?

Jun 07, 2017 (0) comment ,

When contemplating property investment, the associated benefits are important.

The benefits that an investment property poses to an investor are substantial. Both in the long and short term, savvy investors are attracted to the monumental value that the property should provide.

So how do we maximise these benefits?

The talk of the town recently has been surrounding interest rates. Rates and lender selection is a controversially-soaked topic when it comes to property investment and its fickle analysis. This is largely due to them being a crucial aspect that can heavily affect your profitability as an investor.

For many investors, the hottest questions at the moment are:

Should I be locking myself into a fixed rate? And if so, when is the best time to do it?

Let’s take a look at some of the issues that surround variable vs. fixed, and suggestions as to what’s the best direction to take.

The Future’s Uncertainty

Although we have property experts to predict and project what ‘could’ happen in both the near and distant future, this kind of certainty still isn’t enough to convince some investors one way or another. Obviously and ideally, we want to know exactly what we should be doing with our rates, but all the property gurus in the world still won’t be able to get it 100% right.

This however, is both a problem and a suggestion.

A common argument that is repeatedly put forward, is that we should lock in our rates and take the safe route while we can. But what happens if in two years’ time the rates drop or there’s a significantly better deal? And what if we’ll want to sell or refinance the property during the fixed term?

Going Fixed

Pros

  • Eliminates risks associated with a variable rate loan – certain and consistent payments.
  • Your interest rate won’t rise for the agreed upon term.

While these two points sound fantastic, these advantages usually come at a price. Also, you should be aware that a ‘fixed term comparison rate’ is a rate that is locked in for that term only, not the life of your entire loan.

Cons

  • Breaking your loan agreement to sell, refinance (with another lender) or due to defaulting could see you paying expensive exit fees.
  • You’re unable to take advantage of savings if rates decrease.

Going Variable

Pros

  • If rates drop, your repayments decrease.
  • Beginning rates are generally lower which helps with the cashflow.
  • Option to have an offset account or redraw facility.
  • Studies have shown that usually variable rates are a more cost effective option.

Cons

  • No control over fluctuation of mortgage repayments.
  • Inconsistency with repayments can affect your lifestyle financially.
  • Even a slight increase can cost you tens-of-thousands long term.

 

Today, lenders are opting to act independently to secure larger profits. This means even if the RBA decides to lower or hold the rate, your lender could just as easily do the opposite. But if you are prepared for the risk, a variable rate can pose it’s benefits too with a lower  interest rate and flexible offset opportunities.

 

So, is now the right time to fix rates?

The bottom line is that your mortgage needs to work for you and your lifestyle.

Unfortunately, there is no definite answer, however in terms of risk vs. benefit, considering we’re now playing a lender’s game, it generally makes sense to fix your rate, unless you’re planning on selling or refinancing in the coming years.

If you are on a variable rate loan, it’s recommended to review it every few months and evaluate whether or not it’s working for you. If not, look at changing lenders or perhaps fixing.

In the end, it really comes down to your specific situation, how comfortable you are with risk and whether it works in your favour.

Get in touch with Ethan today to discuss your specific needs.

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