4.58-4.75% IO fixed with offset and redraw

[WattleIdo]

Hi brokers,
I will be living in the new property for the first few years doing renos and will have 2 loans associated with the property:
1/ the split equity loan which is already IO with offset, waiting to be used on the deposit and renos.
2/ the balance of the loan. Does 4.58% for 3 years or 4.75% for 5 years; IO fixed with offset (and redraw available) sound like the go?
Would this be the best way to maximise both flexibility and the possibility of reducing repayments right now?

 

[Terry_w]

You should not need to use redraw as it will have bad tax consequences.

I won't comment on whether you should fix or not other than consider what could happen if you need to change lenders (perhaps for serviceability reasons).

 

[Rolf Latham]

fixed with offset sounds great

and it is if u can draw cash or variable rate loans to hedge against the fixed rate

The core question isnt is this the right thing.

the foundational questions are

1.

what do you FEEL rates will do over the fixed period you have selected


2. Later


ta
rolf

 

[WattleIdo]

Cheers guys.
OK no redraw until the time comes when I want to pay it down.
Food for thought with the time span of the loan if fixing.
I guess at this stage it looks like rates won't be going anywhere for a while - so if I wanted to fix, a shorter term could well be even more advantageous than a long term fix.
In 2 or 3 years the rates might be pretty similar to what they are now (that's what it looks like when you look at the rates associated with fixed terms). But in 5 years they might have moved and the low rates will be gone ... forever...???

 

[Juliana Ardila]

Cheers guys.
OK no redraw until the time comes when I want to pay it down.
Food for thought with the time span of the loan if fixing.
I guess at this stage it looks like rates won't be going anywhere for a while - so if I wanted to fix, a shorter term could well be even more advantageous than a long term fix.
In 2 or 3 years the rates might be pretty similar to what they are now (that's what it looks like when you look at the rates associated with fixed terms). But in 5 years they might have moved and the low rates will be gone ... forever...???

The fixed rate period depends on your adversity to risk. If you would be more comfortable knowing what your repayments will be for the next 5 years then go for it. You have to bear in mind that they may come down more but historically, they are bound to go up again in the near/far future.

I have clients that prefer a full variable rate with offset, others want to do half fixed half variable and others just want to fix for 5 years.

It is best to ask yourself about your future plans:
- will you be likely to refinance in the future?
- do you want to sell in the short term?
- on a scale of 1 to 10 how worried are you about interest rates rising? would you be able to ride out the increase?
- is the offset on fixed 100%? are there any caveats/limits?
Having a portion fixed and a portion variable can give you the best of both worlds, but again, it all depends on you situation, goals and objectives.

There are much better fixed rates in the market at the moment but again, it all depends on your particular circumstances. I.e. LVR, borrowing capacity, income source, goals etc...

I hope this helps.

 

[Redom]

Some good advice here.

When considering fixed rates, I like to look at how the overall portfolio will go with a few interest rate increases. For those sophisticated investors with large debt holdings, a 1% rate increase can seriously hurt cash flow.

Taking a look at rate rises in the past, they never really happen in silos. There's a general phase of rate increases (more than 1).

Fixing rates over different maturities controls some of this risk down to a manageable level.

In the main, its all about risk management to interest rate changes. Pricing concerns tend to be marginal at best.

Cheers,
Redom

 

[rizzle]

Cash rate futures

Translation: By August/September this year, the markets expect the RBA rate to drop to 1.75%. Anything beyond mid 2016 is anyone's guess.

 

[WattleIdo]

Great input, thanks everyone.
rizzle, that graph is very interesting.
I suppose when the property is cheap, the interest rate doesn't matter all that much with the odd .5% either way. With my current lender, the fixed IO rates are lower than the variable. I suppose TMBank is wanting to lock in a few customers for security.
So fixed IO is still looking good to me. Not planning on selling this one but might be able to pay it out early if I sell another one. Big IF though.
Will consider doing split options.
Thanks