Has the time come to fix your investment home loan?

Opinion: David Lammey, Firstmac’s General Manager of Digital Brands

Home loan interest rates are always a hot topic in Australia because they have such a big impact on our great love of residential property.

Yet in the past couple of weeks, there seems to have been an even higher level of chatter on rates, coming from a couple of different curiosities.

The first has been the attention on the large numbers of interest-only home loans that are due to expire and transition into requiring principal and interest repayments (which by default can drive monthly repayments up by more than 30%). Some commentators have said this could trigger a substantial amount of ‘mortgage stress’ amongst homeowners, which could lead to a broader erosion of property values across the market.

Secondly, there has been increasing commentary around the prospect of rate rises, not driven centrally from the RBA increasing its cash rate, but rather from those many individual lenders in the market who have had their cost of funding increase markedly in the past month or so.

It’s been a long time…..

After what has seemed like an eternity since the RBA last changed the official cash rate (down by 25 basis points to 1.50% back in August 2016), it probably shouldn’t come as a surprise that some people are making a big deal out of the current chatter.

But is it enough to move the needle on shifting mortgage holders from their variable rates across to fixed rate home loans?

RBA Cash Rate

Anecdotal evidence coming out of Savings.com.au’s sister brand loans.com.au (both of which are part of Firstmac – Australia’s largest non-bank lender) is that people are starting to bring up the topic of fixing their home loan rates more frequently in conversations.

Talking to thousands of people every month shopping for new home loans (both purchases and refinancing) as well as taking calls from their tens of thousands of existing customers, the Lending Specialist and Customer Care teams at loans.com.au have a front row seat to where the trend changes in the mortgage market often begin to appear.

And the message from them is that a lot more people are starting to consider fixing the rate on their new or existing home loan.

Will this lead to a material shift? Only time will tell, but several of the more experienced team members at loans.com.au in those customer and prospect facing teams say that these shifts in the market can happen quite quickly.

But back to interest rates and prosecuting the case for fixing a home loan now.

Where are we really at in the current cycle? What sorts of investor rates are currently available in the market and how do they compare to the good variable rates on offer?

Interest-only (IO) home loans have been extremely popular with investors over the past decade as property values have soared, so let’s have closer look at them in the context of what might possibly be gained (or saved) between the different fixed and variable rates on offer across the market.

Running the numbers on Fixed vs Variable (Right Now)

Having a quick scan at the broader market for comparison rates on standard variable interest-only investment home loans revealed there were around 10-12 products available which were priced under 4.4% p.a. Rates were as high as 6.75% p.a, which highlights the importance of being vigilant and staying aware of the rates on offer across the broader market.

In looking at the same search criteria but for three-year fixed loans, you might be surprised to discover there were around seven or eight loans priced under 4.45% p.a. (while others ran as high as 6.33% p.a). There was also around the same number of loans under that 4.45%p.a mark for the two-year fixed category.

So if you believe interest rates are going to rise in the near to medium future (as many individual lending providers have already started to display), there are indeed good options available for you to fix your investment loan for two or three years at around the same price as some of the leading standard variable IO rates currently on offer.

The comparison rates on offer from the ‘big four’ lenders within the same three-year fixed loan IO category were substantially higher, and ranged from 5.27% p.a. to 6.00% p.a., which is a significant premium on what is available from some of the sharper lenders in the rest of the market.

Interestingly, the best priced option from the ‘big four’ banks was part of a package deal.

Packages?

Which brings up another option worth considering if you are looking to fix your home loan rate in this current market. There are some very good fixed rate deals available within home loan packages that target not only your investment property, but also the home that you live in (i.e. owner-occupied).

Whilst it might require a little bit more organising on your behalf to bring a second loan across to a new lending provider, lenders, who are effectively ‘winning’ two new loans for the price of one (given their acquisition costs) will often make it worth your while with great rates for both. Some may even let you fix one of your loans whilst letting you keep the other on a variable basis within the same package.

How to decide

At the end of the day, making a decision on whether to fix your home loan or not comes down to both your motivation to save and your appetite to take a chance that you’ll guess correctly on rate movements. One of the primary drivers of people who fix their loans is to achieve a level of certainty around how much they will have to ‘pay’ each month to service their loan (as opposed to trying to get the best interest rate on offer). This is particularly evident in the investment market.

For others, it is about trying to beat the lenders at their own game and securing a rate which will prove to be cheaper than the prevailing variable rates of the time.

Whichever factor drives you, the one thing for certain is the importance of staying abreast of the changes occurring in the market so that you can take positive proactive action at the right time to optimise your home loan rate and save money.

The Savings Lesson

  • If rates go up in the future, fixing your interest rate now can save you money on your monthly repayments.
  • Because many two and three-year fixed rates for investors are nearly the same as some of the current variable rates on the market – there is virtually no money risk in fixing (normally fixed interest rates are higher than variable rates).
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How to Grow Your Wealth with Property Investment

Buying property can be a great way to invest in your long-term future. Before you make the first move towards investing in property, you need to get educated. That’s why we’re here! This simple guide to growing wealth with property is designed to show you five ways bricks and mortar can translate to beach holidays and financial freedom.

Leverage

Leveraging allows you to use the cash you have available to purchase a more expensive property. Let’s say you have $60,000 in cash. Using debt you can purchase a property for $300,000 using your cash as a 20% deposit. Now you control an asset worth $300,000 for just a $60,000 outlay. If the property appreciates at a rate of 5% per year, you’ve gained $15,000 in the first year. Compare that with gaining 5% on your initial $60,000 deposit (that would be $3,000) and you can see how powerful leverage is when it comes to growing wealth.

Rental income

Income from rent is your bread and butter in the property investment game. If you’re lucky, the rent you receive will cover all your outgoings. Rents should rise over time whilst debt reduces, creating positive cashflow to fund your lifestyle.

Debt reduction

Some people like to think of property debt as forced savings. Whilst that is an oversimplification, it’s true that paying down any debt you owe on the property as quickly as possible will boost your net worth, therefore increasing your wealth.

Tax advantages

If you are a wage or salary earner or self-employed, you can receive generous tax deductions for expenses relating to your investment property. Paying less tax increases your monthly cash flow, just another way property investment can provide financial freedom. For more information on rental properties and taxation, the Australian Tax Office have some prerecorded webinars available on their site.

Capital growth

Capital growth is simply the increase in the value of your property over time. Capital growth is how you continue to add to your property portfolio. As your property grows in value and you reduce debt, you can borrow against your increased equity to buy more investment property. Property is a long-term investment, and should never be viewed as a way of getting rich quickly. If you buy well, however, your very first property could be worth much more than you paid for it by the time you choose to retire.

Investing in residential property is a great way to build wealth. You can use debt to leverage your cash into a more expensive property. Rental income helps pay the associated expenses of ownership. As you reduce the debt you increase your equity. It’s tax-advantageous meaning you can claim a large portion of expenses against your own income. Finally, capital growth is the cherry on top which helps to increase the value of your property over time.

Got any tips for investing in property? We’d love to hear your comments.

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