Buying now, would you fix rates?

[WinstonWolfe]

want2bewealthy, don't think anyone has mentioned it yet, but did you know you can fix half your loan while the other half stays variable? a reasonable risk management strategy in uncertain times.

as for where rates are going, Alan Kohler was on the ABC 730 report tonight and believes the Aussie economy is like Thomas the Tank Engine going flat out and the bridge is down up ahead.

I respect the guy's judgement and he believes the RBA are being too agressive with the rate rises. Rises generally kick in after a 6-18mths lag....As Alan pointed out, neither the RBA or US Fed get rate adjustments right much at all. Look at the messing the US fed have done in the last 12mths.

Anyway, it seems to overcome the lag factor, the RBA is better off scaring the pants off everyone via the media....seems to work quicker.

Last October I didn't think rates would go up more than 3 times up to mid 09, before coming down.

However, the RBA seems to be getting more aggressive in their little chats......From my readings they currently prioritize their decisions on the following factors, in this order:

1 the commercial private sector's current low DSR levels
2 the robustness of the economy
3 current low rates of resi delinquencies

This sort of makes sense, as employment and wages are comparatively secure when the economy is running well. And resi defaults aren't likely to blow out unexpectedly.

Another consolation is IMHO that rents rises should track rate rises, so your cash flows shouldn't blow out too much. (which is a good reason not to grant soft 12mth leases in this climate)

Anyway, its a hard call at the moment.

Hmmmmm....does anyone take bets on which way rates are going?????
IAS? or any of those northern territory outfits????

Would be a nice way to hedge

 

[kegger]

After studying financial markets full time for 3 years, I am totally convinced that variable rates will be a cheaper option for the property investor in the longer term. Hundresd of sudies have been undertaken, written about and rewritten about and 9 times out of ten, they conclude that the investor would have better off with a standard variable rate. Of course, the issue is whether the potential of increased costs might cath you out in the early years.

My apolgies for the above comments without any supporting docs. I ditched all my texts a few years ago. Have done some net searches just now and can't find any reference to these studies. owever, pull out any uni textbook an banking or financial markets and there will most likely be a chapter dedicated to this comparison.

 

[GoAnna!]

After studying financial markets full time for 3 years, I am totally convinced that variable rates will be a cheaper option for the property investor in the longer term. Hundresd of sudies have been undertaken, written about and rewritten about and 9 times out of ten, they conclude that the investor would have better off with a standard variable rate. Of course, the issue is whether the potential of increased costs might cath you out in the early years.

I think its easy to forget that its whether you can carry the cashflow in the next 6 to 12 months that's the most important. Actually paying this month's bills is kinda important too. The overall position in a 10 year span means zip if the bank takes your property becuase you can't keep up with repayments.

I always ask myelf "If I take this choice will I be able to hold my properties?" I have some fixed, some variable and staggered fixed so that I am not letting it all fly in the wind at any one time. With my debts I can't afford that kind of gambling.

 

[kegger]

I agree with you that short term cash flow may lead you to fixing rates, however IMHO you will be much better off in the long run if you can handle variable rates. Capitalise some interest if you have to.

 

[jingo]

I think its easy to forget that its whether you can carry the cashflow in the next 6 to 12 months that's the most important. Actually paying this month's bills is kinda important too. The overall position in a 10 year span means zip if the bank takes your property becuase you can't keep up with repayments.

I always ask myelf "If I take this choice will I be able to hold my properties?" I have some fixed, some variable and staggered fixed so that I am not letting it all fly in the wind at any one time. With my debts I can't afford that kind of gambling.

I agree with this! I try to ensure that I don't have too many loans maturing at once. I like to stagger them!! I have most of my loans fixed, and a small proportion on variable at this stage. It may cost me more in the long run, but at least I can sleep at night and know that my IP's are not going to be taken by the bank!!

Regards Jason.

 

[kegger]

There is much more to it than this. If you keep rates at variable and you have plenty of 'sleep at night' buffer, then you are home and hosed. The banks will not take your property if you have a $10k buffer to cover you for costs of investing like rising interest rates. Make it $20k if that helps....

This is just my opinion.....happy to be convinced otherwise if need be.......

 

[alexlee]

There is much more to it than this. If you keep rates at variable and you have plenty of 'sleep at night' buffer, then you are home and hosed. The banks will not take your property if you have a $10k buffer to cover you for costs of investing like rising interest rates. Make it $20k if that helps....

This is just my opinion.....happy to be convinced otherwise if need be.......

Depends on your loan balance. $10k would disappear pretty quickly if you have $1m in debt, yes?
Alex

 

[chilliaa]

After studying financial markets full time for 3 years, I am totally convinced that variable rates will be a cheaper option for the property investor in the longer term. Hundresd of sudies have been undertaken, written about and rewritten about and 9 times out of ten, they conclude that the investor would have better off with a standard variable rate. Of course, the issue is whether the potential of increased costs might cath you out in the early years.

My apolgies for the above comments without any supporting docs. I ditched all my texts a few years ago. Have done some net searches just now and can't find any reference to these studies. owever, pull out any uni textbook an banking or financial markets and there will most likely be a chapter dedicated to this comparison.

Could this be because interest rates have trended downwards since 80's and maybe as far back as the 70's.

 

[chilliaa]

I am really sticking my neck out here,
but i think you have to be very careful using short term historical trends to forecast into the future. (i think pyschologists called call it select bias or something)
I remember the media back in 1999 saying residential property would be a dead asset class because of reduced long term inflation (analysts seemed to have forgoten that prolonged low inflation tends to be coupled with long low interest rates) and because GST would adversely effect residential property (costs cannot be claimed back).

The point of the above is to highlight that we have to be careful using recent history to extrapolate into the future.

Personally the decision to fix/keep variable, should be based on more on the decision on whether you plan to hold the property for the long term or dispose of it than on trying to 'save' on a couple of % points.

If you are planing on keeping the asset for the long term you should fix for a similar duration or for as long as possible (of course with consideration given to difference between long term and short term interest rates). This creates an elemant of insurance. (just look at all those property trusts with high gearing. If they had fixed for a long period, they wouldnt be having the refinancing troubles they have got now).

Ok now to my speculative forecast (with due respect to the fact that i think most forecasts are not worthe the paper they are written on)
I think interest rates are going to TREND upwards NOT downwards.
We have been in a long term downwards spiral in interest rates similar to the period of the 50's and 60's. I think this is going to change. Briefly here are my reasons
1) China factor: Industry 'hollowing out' to China has enabled producer prices to be depressed. This is comming to an end now (note inflation in china is now 7%, wage increases are 10%+). Increased in producer prices will lead to increases in CPI
2) Aussie dollar is trending above its long term average. A reversion to its mean would increase imports leading to higher CPI
3) Increase in Asia's wealth will lead to increased consumption of agricultural products, this will increase raw material food costs for australians feeding into CPI.

We may see period of 'lower' interest rates in the future but these will not be of the duration we have witnessed over the last 20 years.

Personally as stated previously in this forum i have 70% fixed loans ranging between 10yrs to 20yrs.

 

[alexlee]

If you are planing on keeping the asset for the long term you should fix for a similar duration or for as long as possible (of course with consideration given to difference between long term and short term interest rates). This creates an elemant of insurance. (just look at all those property trusts with high gearing. If they had fixed for a long period, they wouldnt be having the refinancing troubles they have got now).

Their problem isn't the RATE, it's the MATURITY. Centro, for example, used short term financing for a part of their purchases, and couldn't get it refinanced when it became due. They probably wouldn't have had any problems paying the interest.

Since all of our mortgages are 25+ years, we don't really have that problem. Except when the interest only period ends, it converts to P&I and payments increase by 2% of the principle a year due to the P element. There's a risk that you can't refinance to another IO loan. But that risk can be mitigated by cashflow management.
Alex

 

[markp]

I fix every time that way Im dealing with certainties.

 

[chilliaa]

Their problem isn't the RATE, it's the MATURITY. Centro, for example, used short term financing for a part of their purchases, and couldn't get it refinanced when it became due. They probably wouldn't have had any problems paying the interest.

Since all of our mortgages are 25+ years, we don't really have that problem. Except when the interest only period ends, it converts to P&I and payments increase by 2% of the principle a year due to the P element. There's a risk that you can't refinance to another IO loan. But that risk can be mitigated by cashflow management.
Alex

Yes you are right, sorry about that.

 

[Peter_Tersteeg]

Last week, I would have said fix for 3 years. This week, it's becoming tough to call.

Keep in mind, fixed rates can actually be broken. The lender will charge you an adminastrative fee plus the economic loss.

The ecomonic loss is basically a calculation of how much the lender would loose by you breaking the fixed rate, when compaired to the variable rate. If the variable is lower than your existing fixed, this can be a large amount.

On the other hand, if the current variable is higher than your existing fixed, the lender probably won't have an economic loss, so they're not in a position to charge you anything except the admin fee.

Given that rates are still expected to climb for the rest of the year, fixing would probably save money in the short term. If rates start to drop, and the trend looks like it may continue, you could time an exit strategy from the fixed rate so it minimises your cost whilst getting you the benifit of dropping variable rates.

I've successfully executed this myself, but it does require a bit of crystal ball gazing, as well as good timing. If you miss the window, it could cost you.

 

[investwest]

Go variable, because I believe rates will fall after a year or two. On the condition that I have the cashflow to keep holding even if I'm wrong and rates do go up 3%.
Alex

Gee, I hope you're right, because nothing seems to be slowing down inflation, everyone is spending, spending and spending, when will it stop?

 

[alexlee]

Gee, I hope you're right, because nothing seems to be slowing down inflation, everyone is spending, spending and spending, when will it stop?

I hope I'm right too. But I'm also prepared for much higher rates. If your cashflow can't sustain more rate rises, fix.
Alex

 

[Tim]

After studying financial markets full time for 3 years, I am totally convinced that variable rates will be a cheaper option for the property investor in the longer term. Hundresd of sudies have been undertaken, written about and rewritten about and 9 times out of ten, they conclude that the investor would have better off with a standard variable rate. Of course, the issue is whether the potential of increased costs might cath you out in the early years.

My apolgies for the above comments without any supporting docs. I ditched all my texts a few years ago. Have done some net searches just now and can't find any reference to these studies. owever, pull out any uni textbook an banking or financial markets and there will most likely be a chapter dedicated to this comparison.

But that hasn't been the case since year 2000 - I fixed all of my rates since then up until just recently on over a dozen properties and this has been far cheaper than variable rates....

Tim

 

[sash]

I think we are in for another 25 basis point increase next week....potentially the banks may add another 5-10 basis points to cover their so called funding cost increases.

In my opinion...the horse has bolted for fixed rates. If you must fix...for 1 year max.

I am in the camp that is saying that the reserve bank has gone too far. As a matter of fact, I was in Southwest Sydney (Bankstown) area...and I was gob smacked by the number of "mortgagee excersing the power to sell" sales. Additionally, one agent told me that some owners are just leaving their places and letting the bank repossess properties.

I believe that rates are headed down by year end once the 3 rates rise (4 if there is one next week) bite hard by June 2008.

So, I am keeping my head.....whilst I may fix for a year for certainty...I don't see rates going past another 25 basis points after next week as banks have also added another 20-25 basis points.

I do feel for the people coming off 6.5% rates to potential 8.5% rates.....oouucchhhhh!!!!!

 

[jingo]

I do feel for the people coming off 6.5% rates to potential 8.5% rates.....oouucchhhhh!!!!!

At least we can raise our rents to help us meet the increased costs. OO's cannot pass the cost onto anybody else.

 

[THEHEATH]

I would fix, but only for 3 years. I can't see rates decreasing as quickly as they have increased. I think rates tend to come down more slowly than they increase. Could someone tell me if I have my facts wrong here please?

You're not right, but you're not wrong. They RBA will decrease them as quickly as necessary depending on the numbers they get. If the economy needs the rates to be cut quickly then that's what they'll do.