Fixing Rates

Reply: 1
From: Waverly Bay

Thanks Paul, enjoyed the article.

The article indicates that over a 10 year period one was able to derive a 1% interest rate saving by fixing rates at the right point in the interest rate cycle. However, if the rate was fixed at the wrong part of the cycle, you could be out of pocket by as much as an extra 3.5% !

The other thing to note is the 1% interest rate saving from fixing correctly is the "gross" saving: so assuming one is able to time the fixing of rates accurately..... the interest rate saving calculated on an AFTER-TAX basis is marginal at best.

One thing the article does not mention is the break costs associated with fixed rate loans. Recently I heard the case of a purchaser of a Manly, NSW unit being up for $90K break costs from his CBA loan.

Scary stuff.

I value my flexibility and therefore have never fixed rates on my IP loans. I will not sell this flexibility for the potential marginal benefits - if any - associated with the fixed rate loans, preferring instead to hedge against future interest rate rises by controlling my gearing levels

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Reply: 1.1
From: Rolf Latham

Hiya Guys

My clients are advised that fixed rates are not there to be gambled with, rather a risk management tool. If your exposure is such that you can not sustain 18 months of spiked rates without selling down any of your portfolio then you should look at fixing some of your exposure to mature at different times.

In my view, fixed rates are really nothing but an insurance premium, properly set up they should cost little, but can provide great protection.

PS Re Casinos - The house always wins in the long term !

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Reply: 1.1.1
From: GoAnna !

Rule number one - protect your capital. Never place yourself in a position where you HAVE to sell.

I have rolling fixed rates as an insurance policy and with 80% of them have come out in front. Recently broke one that I had been paying 6.8% on for years. Costs $600. Saved way more than. And having confidence in future cash flow planning allowing me to consider further acquisitions is priceless.

GoAnna !
(aka Anna before she got real)
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From: Paul Zagoridis

Hi gang

Thanks for considering that article. It leaves out is that the interest rate trend over the last ten years has been down. Therefore NOT surprising that there was only 1 month when fixing was better than variable.

The decision to fix is about risk management - Rolf said it well! I'll tattoo it inside my eyelids.

If the deal makes money now, why would I not fix and guarantee that profit? Greed alone is not a good reason. But that is the main reason for most investors. They end up paying the price when rates spike up. Who can afford at 33% increase in outgoings? That's what you get when rates go from 6% to 8%.

So the only reason not to fix is flexibility.

GoAnna's point to "Never place yourself in a position where you HAVE to sell" is priceless.

I learned that lesson through experience. I think most people do. Once learned they never forget it.

But circumstances change and break costs during rising rates are VERY HIGH.

So balance security for flexibility.

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