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From: Mike .


Fixing rates and rental increases:help please LES and others
From: vivienne
Date: 6/17/00
Time: 9:00:45 PM

My husband and I have four inner city Melbourne properties (3 invest 1 home) and have two questions to ask you:

1. We currently have a debt equity at about 50%. We are about to purchase another investment property value about 450k (debt equity will then go to 60/40%) . We have all our loans fixed at 7.5% and maturing in Jan 2005. We are worried that the loan to purchase the new property at 450k (fixed for 5 years ?) will mature in sept 2005. If interest rates took a major hike upwards we would be very stressed. It appears that fixed loans of greater than 5 years are not IO.P&I make the repayments too big for us. Should we break up the 450k into smaller amounts that mature in say 2yrs, 3years, 5years so that at that point we can fix them for 5yrs so as to stagger our risk? Or what would you suggest?

2. Property prices in Melbourne have doubled over the last 5yrs. Rents have not kept pace with this. When would it be reasonable to expect rents to follow suit?

Thanks for your help
 
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Les

Reply: 1
From: Mike .


My 2c worth
From: Les
Date: 6/17/00
Time: 10:41:03 PM

G'day Vivienne,

I can understand how you might feel - the "5 year crunch" in action (from a real early post). Do the other aspects of "the crunch" also apply? (i.e. loss of depreciation and borrowing costs deductions). In other words, did you just buy these 3 in Jan 2000, or were they simply re-financed then?

All of the pundits I have heard or read are talking rates going down again over the next couple of years. And in an attempt to split up your refinancing, I would suggest go 1 - 2 years fixed (or variable, if you can stand it!!). With any luck, you might be refinancing for another 5 at a lower rate.

Other options might include Andrew G's "US bond purchase" which he describes as cheaper than fixing with a bank. Also, I believe the "cost" of breaking out of Fixed is HUGE if rates have gone down, but if rates are the same (or up), then virtually no cost to "break out" - maybe you can use this (in 3 years time) to "break out" another of your loans and refinance a 5 year term at that time. This could serve to make the year 2005 "easier to take".

The good thing is you have 4 + years to arrange how to handle 2005 - and you're already considering it, so you're in good shape !!!


Re the rents - inflation plays a part here, along with supply/demand, while prices of property are almost purely driven by supply/demand. Your answer will likely come from your own knowledge of your area. Is there an over-supply of that kind of property? What is the rental vacancy rate? If high, then there's not much hope for rent rises (tenants can pick and choose). If in short supply, then you could likely see rents rise in the near future.

How about "adding value" to your properties (some of Andrew G's cheap but effective additions that can boost the rental return), or changing the style of the IP (to furnished accommodation, or corporate offices, etc.)

Just a few ideas - I know others out there have already "been there, done that" and I would appreciate their input here too. (New dogs like to learn old tricks ;^) woof!

Regards, Les
 
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Vivienne

Reply: 1.1
From: Mike .


Re: My 2c worth
From: Vivienne
Date: 6/18/00
Time: 7:03:43 PM

Abundant thanks Les. You have given us some good ideas to think about. We always admire your sound sense when looking at other peoples queries. (we might initiate the official Les fan club)

regards, Vivienne
 
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Pierre

Reply: 1.1.1
From: Mike .


Mirror mirror on the wall .. Will interest rates rise or fall?
From: Pierre
Date: 6/19/00
Time: 9:41:07 AM

I was looking at the Property section of the weekend paper and had a bit of a look at the table that compared interest rates. One interesting thing I noticed was that a couple of lenders had 3 year fixed rates that were lower than variable rates. NAB and (I think) Suncorp were among the few that had this.

In fact, I've just checked the NAB rates. They have 1 and 3 year fixed rates that are lower than variable rates, and have 2,4 and 5 year fixed rates that are higher than variable rates.

Now, any bankers out there? Surely this means that those lenders think rates are likely to fall in the next three years, and that rates aren't likely to go too much higher.

So Viv, maybe you can look at fixing with a lender that that can offer a similar scale. Three years at lower than current variable rates looks pretty attractive.

Anyone with other thoughts on this???

Pierre
 
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Vivienne

Reply: 1.1.1.1
From: Mike .


Re: Mirror mirror on the wall .. Will interest rates rise or fall?
From: Viv
Date: 6/20/00
Time: 8:16:00 PM

Pierre, Thanks for your insights. I see what you mean.
 
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Hoover

Reply: 1.1.1.1.1
From: Mike .


The big question - fixed or variable
From: Hoover
Date: 6/19/00
Time: 10:49:41 AM

I'm sorry Vivienne to change the subject slightly, but I would really be interested to hear peoples opinions about the fixed or variable interest rate dilemma. I'm looking around for my third IP and the advice that I have at this stage is that variable is better, at the moment. I have heard that interest rates are near their peak and will probably start heading down again in the future. Another reason is that interest hikes taken gradually give you more time to adjust than five years on the one rate and then a big hike at the end. What do Y'all think?

Regards, Hoover
 
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