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Your investment property: Should you fix the interest rates?

Increasing value of your investment propertyI have a scenario for you to consider.

Think of the popular TV game shows like ‘Who wants to be a millionaire’ or ‘Sale of the Century’ (if you are old enough to know what I am talking about). Now imagine you are a contestant on the show and you have won $50,000 and you have the opportunity to walk away and take the money, or come back the following night and risk it all to increase your winnings.

What would you do?

Would you risk it all for bigger winnings or would you want the certainty of knowing you are better off, even if your winnings aren’t as big as they could potentially be? Would you play it safe or risk it all?

It’s a tough decision, isn’t it?

Now let’s apply the same type of scenario to the investment mortgage rate on your investment property. If you had the option of locking in your investment mortgage rate now at a fixed (but highly competitive) rate for the next five years or avoid locking it in to benefit from a lower interest rate now but know you could be exposed to higher repayments if interest rates start to rise – what would you do?

Would you play it safe and lock in the repayments on your investment property so you know exactly where you stand for the next five years? Or would you throw caution to the wind and hope interest rates will remain at the current all-time low levels?

It is difficult question and there is no easy answer. You can see the advantage of fixed interest rates, but the disadvantages could be strong. Every investor needs to make an informed choice and one that suits your individual investment objectives for your investment property. So to help you with your decision making process I have collaborated with the ABN Group’s dedicated investment mortgage rate brokerage company, Resolve Finance, to outline a few factors every investor should take into consideration, helping you decide whether or not you should take advantage of fixed interest rates.

The Disadvantage and Advantage of Variable Interest Rate Loans

  • The variable rates advertised by a few of the major banks are in some cases on par with the fixed rate, however you might be surprised to know your mortgage broker can sometimes secure you an even lower variable rate on your investment property than what is advertised. So don’t assume you know what rates to compare until your broker has shopped around for you!
  • If interest rates continue to drop, you will benefit from the reduced rate but at the same token – you are also exposed to potential interest rate rises;
  • Variable loans are more flexible if you want an offset account or to make extra lump sum repayments plus the penalties aren’t as high if you want to exit the loan early.

The Disadvantage and Advantage of Fixed Interest Rates

  • Banks are currently offering record low fixed loan rates so you are guaranteed a low rate for your fixed loan period and will know exactly what you need to repay;
  • If interest rates go up, yours will continue to stay the same, which is a strong advantage of fixed interest rates for people on a tight budget or anyone who prefers to know exactly what they will need to pay;
  • Often you can’t pay back extra on a fixed rate loan or the extra amount you can repay is capped each year so fixed loans may not suit high income earners or anyone planning to pay back their loan ahead of schedule;
  • It is generally harder to get an offset account with a fixed rate loan (only a couple of banks are doing it) so don’t automatically assume you will be able to get the benefits of an offset account if you fix the loan on your investment property;
  • There are generally high fees associated with breaking a fixed rate loan so if you think you may want to sell your investment property in the short term or your financial circumstances might change, it may not be wise to lock yourself into a fixed rate loan;
  • The window of opportunity won’t always be open – once economists start talking of interest rates going up the banks will lift their fixed rates too plus banks only have a limited amount of money they are able to loan at such low rates so if you delay too long you may be unable to take advantage of fixed interest rates.

And the final point for everyone to consider revolves around the old saying – ‘what goes up, must come down’ - and the same applies in reverse – ‘what goes down, must come up’. Interest rates on your investment property are at an all-time low now but they won’t stay that way forever and they will rise again. It is just a matter of when and many economists are predicting it will start to happen in the next three to six months.

The question you need to ask yourself is how long are you prepared to take the risk and do the short term gains of sticking with your current variable rate outweigh the long term advantage of fixed interest rates?

Just make sure that when you consider the options you don’t just compare the current variable rate against the fixed rate as it is like comparing apples and oranges. Run some scenarios involving your investment property over one, two, three, four and five years and see whether or not you should take advantage of fixed interest rates.

If you consider all the pros and cons and still can’t make a decision, you always have the option to hedge your bets and split your loan between the two options and receive the advantage of fixed interest rates and variable interest rates.

And although I always encourage investors not to follow the masses and to make decisions that are best suited to their own investment objectives, it is always interesting to see what choices others are making. So while I was discussing this topic with Resolve Finance – I asked them the question:

Of the people who are currently applying for finance or refinancing their property loan, which option are more people choosing – a fixed or variable home loan?

You might be surprised to know that the results vary around the country depending which state you live in. Some general market stats show that the overall proportion of loans arranged for investors softened slightly in July 2014 to 38% from a record high of 40% in 2014. WA has a loan to value ratio (LVR) of approximately 71.5% which is above the national average of approximately 68.2% and approximately 24% of borrowers in July chose fixed loan rates, which was consistent with previous months.

Unfortunately the data isn’t available to know (of the balance) what proportion are variable because some may be a combination of the two but it can be assumed that despite the advantage of fixed interest rates, the majority of investors and home buyers are still choosing the variable option.

Most importantly always remember - if you would like to discuss the options for your investment property in further detail, simply contact an Investor Assist Property Investment Specialist today or if you would like more specialist advice, we can easily refer you to an experienced broker at Resolve Finance for an obligation free discussion. Because we are all busy with our everyday lives and sometimes it pays to talk to the experts.

If you'd like to discuss or investigate your investment property and whether or not you should take advantage of fixed interest rates, don't hesitate to contact our team on 9200 7200 or info@investorassist.com.au

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