Disadvantages of fixing

[strongy1986]

After a bit of help

Currently getting a loan for 2nd IP

Getting a LOC secured against IP 1 for deposit costs
And a second loan secured against IP2 for remaining 80% purchase

Last night the banker offered me a couple of deals including a 2 year fixed rate of 4.89 % . 3 years is 5.09 and 5 is 5.41

I know there are better deals out there but I'm sick of time wasting so will be taking one of these

I indicated to the banker that I really wanted to go for a 5 year fixed rate loan as I feel that in 2 years the rates will be higher as they are already at historic lows

However he tried to say this was not a good idea as there would be fees imposed if I were to sell IP 1 before 5 years is up
This has me confused as I thought it would not make a difference as IP1 is security for the LOC which i thought is always a variable rate?

Is this correct or am i wrong

I guess what I am asking is what are the disadvantages of fixing for a long period of time and what is the process for selling an IP that is used as security for a loan

Thanks

 

[vaughan]

Currently getting a loan for 2nd IP

Getting a LOC secured against IP 1 for deposit costs
And a second loan secured against IP2 for remaining 80% purchase

However he tried to say this was not a good idea as there would be fees imposed if I were to sell IP 1 before 5 years is up...

Double-check that the properties are not cross-collateralised. Then check again to be sure.

The disadvantage for fixing is the break fee. Can be very hefty.

 

[Aaron_C]

Bad thing about fixing is lack of flexibility. I think 5 years is way too long particularly at lowish LVRs.

 

[Peter_Tersteeg]

Essentially you're entering into a contract with the bank to make a repayment at a given rate for a set period of time.

You're very limited in what extra repayments you can make (which can be mitigated by using a split loan).

Breaking the fixed loan contract can be extremely expensive. This means it's rarely worth the cost to move lenders, or switch back to variable if the rates drop further. This could prohibit you from changing lenders if the current lender won't accomidate your future investment plans.

Ultimately fixed rates remove your flexibility. It's not too difficult to plan 2-3 years ahead, but I agree with Aaron that 5 years can be a very long time.

It's also worth mentioning that in something like 2 out of 3 scenarios, fixed rates end up costing more than variable. I can see plenty of scenarios in the immediate future where this might hold true, although I can also see it going the other way as well.

 

[radelaide]

Dont use the same bank to finance both houses!!!

Seriously bad idea, if you miss one payment they can take both houses.

Split your risk, split your banks.

 

[Brady]

Dont use the same bank to finance both houses!!!

Seriously bad idea, if you miss one payment they can take both houses.

Split your risk, split your banks.

Miss one payment then take your house...???

Please provide me 1 example of this happening.

As for OP 5 years is a long time, would want to make sure you had a pretty solid plan

The lack of flexibility can hurt you more then the rate

5 year rates are looking nice at the moment, doesn't mean they aren't going to be nicer soon tho

 

[S.T]

Be wary of fixing if you anticipate getting access to equity during the fixed period, may be up for break costs etc.

 

[Angel]

You never know what might happen. What if you want to sell in a couple of years for whatever reason - again break fees.

 

[travelbug]

Dont use the same bank to finance both houses!!!

Seriously bad idea, if you miss one payment they can take both houses.

Split your risk, split your banks.

If you only bought one house with each bank that would make building a decent portfolio very difficult.
Do some more research on cross collateral to alleviate your fears.

Agree with the others re fixing for 5 years. Particularly as this is your first IP.

 

[tvadera]

Hi,

I am bit confused, OP has IP1 loan with variable rate with LOC to pay for dep, costs for IP2, IP2 he wants to fix for 5 years.

So now I understand if he sells IP2 before 5 years, economic costs would be applied.

But OP wants to know, what happens if he sells IP1 within 5 years? There won't be any economic costs as its variable loan with LOC?

After a bit of help

Currently getting a loan for 2nd IP

Getting a LOC secured against IP 1 for deposit costs
And a second loan secured against IP2 for remaining 80% purchase

Last night the banker offered me a couple of deals including a 2 year fixed rate of 4.89 % . 3 years is 5.09 and 5 is 5.41

I know there are better deals out there but I'm sick of time wasting so will be taking one of these

I indicated to the banker that I really wanted to go for a 5 year fixed rate loan as I feel that in 2 years the rates will be higher as they are already at historic lows

However he tried to say this was not a good idea as there would be fees imposed if I were to sell IP 1 before 5 years is up
This has me confused as I thought it would not make a difference as IP1 is security for the LOC which i thought is always a variable rate?

Is this correct or am i wrong

I guess what I am asking is what are the disadvantages of fixing for a long period of time and what is the process for selling an IP that is used as security for a loan

Thanks

 

[BMan]

as said just above there will be no break costs as IP1 is variable and thats what he would be selling ip2 is fixed
the only problem is you would have to pay out the loc against IP1 for the deposit of ip2
unsure if you can topup IP2 loan and pay out the LOC with it if its fixed maybe split ip2 fixed 80/20 or 90/10 so you still have some sort of flexibility

 

[radelaide]

Miss one payment then take your house...???

Please provide me 1 example of this happening.

As for OP 5 years is a long time, would want to make sure you had a pretty solid plan

The lack of flexibility can hurt you more then the rate

5 year rates are looking nice at the moment, doesn't mean they aren't going to be nicer soon tho

ok ok yes you are correct I was exaggerating..

But anything is possible in the future if suddenly things turn bad, say you lose your job or get injured and suddenly find yourself with no money.

 

[Jenko]

What's the go with releasing equity with split loans?
If you fix a portion of your loan and your property goes up in value is that amount still available as equity ?

 

[Aaron_C]

Yes it is still available either from creating a new loan or increasing the existing variable one.

 

[stargazer]

Hi all

I was of the belief if you fixed now for example at 5.2% on say 5 year term. If interest rates went to say 7% in the 3rd year there would be limited penalty as the bank would rather release relend at the higher rate of the day.

I might be wrong it seems

Regards
Stargazer

 

[RetireRich101]

I would think the 'top up' option that you're allowed within the 5yrs fixed would give some flexibility, though I understand the top up rate may be higher (or lower) than your initial fixed rate.

My accountant encourages to request for a different loan/account number every time I top up, as he believes it's easier to manage for TAX purpose.
For example, one IP I have has 4 separate account to it representing each top up I have had.

I am just thinking out aloud, that if you fix 5.4% now you don't really care so much if the rates goes lower, as most would agree this rate we see the return is either neutral or positive. Its not like locking at 8% like few years ago and you're hurting because its negative geared.