News & Views
Interest Rate
After the last two interest rate increase the RBA rate is likely
to increase one more time from 5.25 % to 5.50%. But is it going to happen in
April or May? Reserve Bank has to weigh in various factors, the strong
dollar, reduced home loans, reduced building activity, halt in booming property
market etc.
In a fix - Is now the right time to fix your investment loan?
To fix or not to fix: that's one of the crucial questions
facing property investors as economists tip a new round of rising home loan
interest rates. We examine the pros and cons. The decision to float or fix,
therefore, should be taken after careful consideration.
Reasons to fix or float
Greg Bussell, Product Manager Residential Investment Loans
and Equity Lines, says security rather than rock bottom rates is the key reason
investors choose to lock-in.
“The major advantage to fixing your investment loan is that
it gives you certainty of repayments for a set period of time. That can be
particularly useful to investors as it helps with budgeting and ensures
cash-flow is consistent.”
“What borrowers are trading off is reduced flexibility in
the loan. Fixed rate loans can come with limits. If you do want to make extra
repayments, or pay off your loan during the fixed rate period, you could face
early repayment costs. There is also limited ability to link to an offset
account and you may find the loan lacks features like redraw,” Mr Bussell says.
What to consider
Mr Bussell says investors considering fixing some or their
entire loan should weigh up the following factors:
What would be the impact of a rate increase on your ability
to service the loan? How would this impact on cash flow? How much would rates
have to rise by to cause pressure or difficulty in meeting the repayments?
What is the economic outlook? Is the outlook expansionary,
in which case higher official interest rates are more likely? What is the state
of the property market? Are your job prospects stable and strong for the
foreseeable future?
Using past rate cycles as a guide, calculate whether it was
better to fix or float over one, three or five years. At what point in the cycle
would it have been better or worse to fix.
Ultimately, many investors choose to have a bet both ways
by fixing part of their loan and floating the other part. And remember, there is
no single correct choice for all borrowers. The right decision comes down to
your individual needs, preferences and risk profile.
