10 Year Fixed

[IshQ]

My scenario:

I am close to settling an IP. I have a rate locked a fixed rate of 7.99% (one of the best around i think) for 10 years.

Should the rate drop below this in the coming years, which it most probably will, i will pay the switching fee and switch to variable.

Two questions:

1) Can anyone see an issue with the above?

2) After getting approval, the lender advises that the loan is P&I only and cannot be IO only. Is there anyway around this?

Can i speak to the bank say in 6 months down the track and request IO only due to difficulty in meeting repayments. Will they be likely to agree?

The difference is IP and P&I is around 4K, 4K which could easily meet the ongoing costs / expenses for the property.

EDIT: Its no point going to another lender and requesting an IO fixed loan at the current rates as the difference in the repayment on the IO loan compared to the above P&I loan would be very very small, if any.

Thanks in advance.

 

[casper007]

Generally lenders only offer IO for 5 years ... even though they will extend.

If you try to switch it later ... you would in effect be writing a new loan and not only paying switching fees but also possibly a new higher rate.

Personally 10 years seems a long time ... 5 is more than acceptable.

 

[Rolf Latham]

Hiya

Many will do 10 year and some even longer fixed rate terms

The switch issue may not be so simple if there is a large gap between the variable and the rate you fixed at.............this is called econmic break cost and could eat you alive IF we end up in a recessionary climate and much lower rates arrive.

Then the lender is likely to want you to PRE PAY the entire period differential between the fixed rate and their effecive cost of funding. If its a big loan this fee can be BIG.

On the issue of conversion to IP from PI..................unlikely for 2 reasons.

Telling a bank u cant afford the repayments will only make them more nervious than they are already, and

Its poss the PI rate is lower than the IO rate which is the case with some lender specials like NAB

ta
rolf

 

[Spectre]

chasing the rate is one thing...
but for 10 yrs you get less for criminal offences.
a higher rate on I/O with another lender might probably be a cheaper payment than p&i.
Noting you dont want to / or maybe cant (?) switch but just throwing that point out there

 

[jaycee]

My 5 year IO loan ends mid next year... what to do next... 7.20% current rate (fixed)

 

[dantheman]

My 5 year IO loan ends mid next year... what to do next... 7.20% current rate (fixed)

You've got some time until then, enjoy the cheap 7.20% rate! You never know if rates will be higher or lower at that time, so enjoy what you have now.

When the time comes, you can do another 5 years IO if you like.

Cheers

Dan

 

[jingo]

My 5 year IO loan ends mid next year... what to do next... 7.20% current rate (fixed)

Hi jaycee,

I am in the same position as you. I have two maturing towards the end of next year at very attractive rates. I have decided that I shall refinance these loans to a rate of 7.94% just before the fixed rate moves. My loans are currently on 6.95%. I would rather pay a higher rate now, and know that I can still service the loans comfortably, rather than watch rates climb to 10%+ and freak out!

Regards Jason.

 

[karina]

I have 2 fixed loans coming to an end of a 5 year period in the next few months. Fixed at 5.89%!!!!

I am thinking to go variable for now and wait for a better time to fix when rates start falling again.

 

[jingo]

I have 2 fixed loans coming to an end of a 5 year period in the next few months. Fixed at 5.89%!!!!

I am thinking to go variable for now and wait for a better time to fix when rates start falling again.

What a beautiful rate - shame to see it go!!

 

[firstmillion]

My scenario:

I am close to settling an IP. I have a rate locked a fixed rate of 7.99% (one of the best around i think) for 10 years.

Which bank / FI is it ?

 

[IshQ]

Thanks Guys! Thanks Rolf.

the 10 year is with NAB. I signed the docs over the weekend.

looking at current rates @ 5 year fixed, i would be paying the same in interest as i would be paying to the NAB for P&I.

Do you think i should look elsewhere and just bear the higher fixed rates for the short term (assuming the interest rates drop within the 5 year cycle) rather than fixing for 10 years?

 

[allblack]

I figure there will be one or maybe .25 interest rate rises this year then rates will start to fall next year (by maybe up to 1%) as the US recession starts to impact on Australia. If this scenario does eventuate there will be a lot of people who have fixed rates over long terms attempting to change to variable, and they will be paying for the pleasure. If you have a 10 year fixed loan this change could be very expensive.

 

[mixedup]

isn't one key disadvantage of a fixed rate loan the fact you can't pay it off faster?

 

[alexlee]

isn't one key disadvantage of a fixed rate loan the fact you can't pay it off faster?

1) Keep one loan variable and have an offset against that.
2) Who cares about paying it off faster? Paying off a loan is 'buying' $1 in equity with $1 of your own money. The return is 8.2% (or whatever your interest rate is) every year. On the other hand, buying another property with that means 5% yield + 7.2% appreciation (my assumptions) compound over the long term.
Alex

 

[mixedup]

interesting...I was considering for me the main blocker to moving on to purchase my 2nd IP would be reducing the amount I have to service on the loan for my 1st IP (i.e. get the DSR down). So wouldn't this imply it's a good thing to pay off a bit of my 1st IP loan fast to lessen the annual loss, until it lessens the loan repayment burdon enough so we can then buy the 2nd IP. It seems to me our ability to meet the loan repayment shortfall after Rent/Negative Gearing benefit is key?

 

[alexlee]

interesting...I was considering for me the main blocker to moving on to purchase my 2nd IP would be reducing the amount I have to service on the loan for my 1st IP (i.e. get the DSR down). So wouldn't this imply it's a good thing to pay off a bit of my 1st IP loan fast to lessen the annual loss, until it lessens the loan repayment burdon enough so we can then buy the 2nd IP. It seems to me our ability to meet the loan repayment shortfall after Rent/Negative Gearing benefit is key?

Theoretically, yes. But because the bank also takes rent into account when calculating your DSR, you may find that you don't have to reduce your loan by much (if at all) before they'll lend you more money. I'm not saying that you should borrow everything the bank is willing to lend you, but don't get it in your head that you have to pay off debts ASAP.

e.g. when I bought my first place ANZ would only lend me $150k. So I bought a place for $170k, borrowing $150k. 6 months later, no change in my salary, ANZ was willing to lend me another $150k for a second IP. Go figure.

A good mortgage broker can do the calcs for you.
Alex

 

[silversands]

best of both worlds

Hi mixedup,
I also am very new to UNDERSTANDING the banking industry but my 5 year fixed rates on 2 properties came to an end at the end of last year ( it was 6.19% ) it was with BankSA. During that time if I so chose to, I was allowed to make voluntary extra payments of up to 20 thousand per year over and above my regular payments. Are you aware if your bank offers similar allowance?
Regards Jodie

 

[mixedup]

Are you aware if your bank offers similar allowance? Regards Jodie

Not yet Jodie, as I haven't chosen my IP lender yet. I do want to make sure I can pay-off more however what I didn't realise was that with the latest "offset account" facilities you can get the same benefit as reducing the loan (i.e. to reduce interest) by just putting the extra money in the offset account. (obviously the meaning of offset account these days has changed since years ago)

 

[chilliaa]

My scenario:

I am close to settling an IP. I have a rate locked a fixed rate of 7.99% (one of the best around i think) for 10 years.

Should the rate drop below this in the coming years, which it most probably will, i will pay the switching fee and switch to variable.

Two questions:

1) Can anyone see an issue with the above?

2) After getting approval, the lender advises that the loan is P&I only and cannot be IO only. Is there anyway around this?

Can i speak to the bank say in 6 months down the track and request IO only due to difficulty in meeting repayments. Will they be likely to agree?

The difference is IP and P&I is around 4K, 4K which could easily meet the ongoing costs / expenses for the property.

EDIT: Its no point going to another lender and requesting an IO fixed loan at the current rates as the difference in the repayment on the IO loan compared to the above P&I loan would be very very small, if any.

The main issue here is can you afford 7.99% comfortably. If you can and you figure you can still make a decent return on this interest rate, then stop trying to gamble. Property is a long term investment and you loan structure should be 'long term' as well.