23/02/2012
Question: My husband and I have been looking at home loans. We’ve noticed that fixed rates are looking good at the moment. We’re happy with our investment property and want to hold onto it indefinitely, the repayments are more than manageable and our LVR is pretty safe at around 70%. We’re therefore not too concerned about break costs. Are there any other issues that we need to bear in mind when considering fixed versus variable at the moment?
Answer: The issue of fixed versus variable interest rates remains one of the most hotly debated subjects in finance. From my point of view both options have sound reasons behind them and the final choice is generally based on what suits your situation at any given time.
In short, a fixed interest rate gives you certainty of repayment, providing a predictable expense each month, over a known term. A fixed rate can provide a solid foundation to budgeting cash flow within your portfolio. Fixed rates can also allow you to borrow more in certain situations as some lenders will use a different method of calculation if a fixed rate is selected at the point of application.
On the other hand, variable interest rate loans allow you to move with the market which is great when the market is going down, but not so good when they are going up. A variable rate allows for flexibility, such as refinancing to access equity for other investments or selling, without the concern of potentially expensive break costs.
As a rule of thumb, variable rates are generally cheaper than fixed rates over time. I will concede though, at the moment, fixed rates do look very attractive.
Regardless of the reasons for the comparison between the two, one issue that can get overlooked when deciding between a fixed and variable loan is the question of accessing funds before fixing.
From your scenario it seems that you are comfortable with the property itself and the LVR is reasonably low. The question I would ask would be whether there is a need for further equity, either as a reserve of funds or whether its needed for another purchase in the future, planned or not. My philosophy is that you should borrow safely to the maximum, when you can, before you need it.
What often happens, in my experience, is that when you find a great opportunity and discover you need some money, the time taken to apply for a loan and process the paperwork can take so long, that you miss out on the very opportunity which you were seeking to capitalise on. Also, the conditions under which you borrow money today can be completely different than when you need the money in the future. If you can borrow safely today, you should.
A serious investor will always have a good reserve because having funds readily available when you need it makes much more sense. Besides, there is no cost to you if the funds are kept in an offset account or paid back into the loan for later access by redraw. Obviously you only accrue interest when the loan funds are actually used.
The suggestion to access funds before fixing is certainly worth exploring. Whether you choose a fixed loan or a variable loan really comes down to what works best for you.
- Answer provided by Vincent Power, Investors Direct
