Implications of fixed rates

[santaslayer]

Hi All,

What are some of the implications/consequences of fixing rates?

ie. penalty rates for selling house during fixed rate period.


Are there any other things I should consider? If I want to use some equity in the IP during the fixed rate period, am I liable for penalty rates as well?

Thanks.

 

[Nathan]

penalty for breaking, also you must remember that when it becomes variable what will rates be?

if you buy say 3 houses @ once id suggest having like a 3 and 5 year fixed rates, so you have time to liquidate if things go pear shaped and not forced to have 3 ticking off on same date @ 3-5% higher then the fixed... just as a bit of risk stratergy...

 

[Propertunity]

Are there any other things I should consider? If I want to use some equity in the IP during the fixed rate period, am I liable for penalty rates as well?

Yes breaking a fixed loan to access equity would incur penalties but there are 2 ways around this:
1. Fix 90% leaving 10% variable. Use this variable component to do redraws and equity draw-downs from.
2. Get a whole new 2nd loan on the property (leaving the fixed one in place) to access the equity.

 

[Alex P Keaton]

Ohhh so you cant access equity from the fixed portion of the loan only the variable. I didnt know that.

 

[Propertunity]

Ohhh so you cant access equity from the fixed portion of the loan only the variable. I didnt know that.

Noooooo, you can access equity from a fixed portion - but you'll incur penalties for breaking a fixed loan.

 

[Invest]

Yes breaking a fixed loan to access equity would incur penalties but there are 2 ways around this:
1. Fix 90% leaving 10% variable. Use this variable component to do redraws and equity draw-downs from.
2. Get a whole new 2nd loan on the property (leaving the fixed one in place) to access the equity.

How do you do the second one? I think fixing a rate is like shooting yourself in the foot, everything you do incurs a fee or some cost when its fixed.

 

[Rolf Latham]

Bit of confusion here.

You can get equity of a property regardless of the initial loan is fixed or variable, or the new equity loan is fixed or variable.

The key thing with most lenders is that they fixed rate loan needs to stay with that lender as does the new loan(s)

ta
rolf

 

[want2bewealthy]

Bit of confusion here.

You can get equity of a property regardless of the initial loan is fixed or variable, or the new equity loan is fixed or variable.

The key thing with most lenders is that they fixed rate loan needs to stay with that lender as does the new loan(s)

ta
rolf

So no penalty pay out for writing out a 'new loan' portion as to draw equity? is a top up loan available for all fixed loans?

 

[Hoffy]

ie. penalty rates for selling house during fixed rate period.


/QUOTE]

Not necessarily. Depends what the prevailing rates are at the time.

Although probably not an issue for an IP, additional repayments are usually capped at a certain level, often 10k per annum.

 

[santaslayer]

If the new loan still needs to stay with the same lender, could there be issues of x-coll? Or can that also be avoided?

Thanks all!

 

[buzzlightyear]

So no penalty pay out for writing out a 'new loan' portion as to draw equity? is a top up loan available for all fixed loans?

If the new loan still needs to stay with the same lender, could there be issues of x-coll? Or can that also be avoided?

Thanks all!

Maybe an example for clarity.

You purchase a property for $300,000 with a $240,000 fixed rate loan (80% LVR) with Bank X. After 2 years, your property is now worth $360,000.

You want to extract the additional equity. You go back to Bank X and say, I want to revalue. You keep the 80% LVR and now you have two loans with Bank X as follows;

Loan 1: $240,000 at fixed rate as originally agreed
Loan 2: $48,000 at either variable or another fixed rate

$48,000 is additional equity calculated, 360,000 x 80% LVR = $288,000 - $240,000.

There is no pay out of the fixed rate loan, that remains in place. As for x-coll, there is nothing relevant in the example above, unless course if you go and purchase another property. You would just need to ensure that the new loan is separate and collateral is new property only. However that would be relevant irrespective of where the funds originated from

 

[santaslayer]

Maybe an example for clarity.

You purchase a property for $300,000 with a $240,000 fixed rate loan (80% LVR) with Bank X. After 2 years, your property is now worth $360,000.

You want to extract the additional equity. You go back to Bank X and say, I want to revalue. You keep the 80% LVR and now you have two loans with Bank X as follows;

Loan 1: $240,000 at fixed rate as originally agreed
Loan 2: $48,000 at either variable or another fixed rate

$48,000 is additional equity calculated, 360,000 x 80% LVR = $288,000 - $240,000.

There is no pay out of the fixed rate loan, that remains in place. As for x-coll, there is nothing relevant in the example above, unless course if you go and purchase another property. You would just need to ensure that the new loan is separate and collateral is new property only. However that would be relevant irrespective of where the funds originated from

Ahh, thanks, understand now.

Of course, making it a separate loan with the same bank may lead them to use the all monies clause in extreme situations, yes?

 

[Peter_Tersteeg]

Of course, making it a separate loan with the same bank may lead them to use the all monies clause in extreme situations, yes?

Both of the loans are secured by the same property. If you default on one and the bank sells the property, both loans need to be repaid.

The 'All Monies Clause' is relevant when there are other assets. This is referring to the banks ability to sell other assets you own to recoup their losses. This isn't a relevant example of this beasty as there's only one asset (the property) involved.

 

[Witzl]

good to know there actually ARE options availble to use equity even with a fixed rate loan.

I now have some food for thought

 

[arungounder]

Top UP

HI Guys,
I have a loan with HomePath (now CBA) Homeloans. I had a fixed rate 2 years ago of 6.47% and I did a Topup on the loan of $20K. They automatically changed my Fixed Rate to 7.14% (That was the current rate at the time of Topup) for another 3 years even though I had another year left of the old 6.47% rate.
By the time I got the first statement and called them the guy said that it is too late to do anything now and because the rates had gone over 7.14% by then I was OK with it.
My Question:
If I did a Topup today will the rates come down to the current level without any Penalty?

Thanks....

 

[Rolf Latham]

Hiya Arun

Nah.

Not without a significant break cost

ta
rolf

 

[Ms Jade]

... They automatically changed my Fixed Rate to 7.14% (That was the current rate at the time of Topup) for another 3 years even though I had another year left of the old 6.47% rate.
By the time I got the first statement and called them the guy said that it is too late to do anything now and because the rates had gone over 7.14% by then I was OK with it....
Thanks....

I had no idea that a bank could unilaterally change a contracted fixed rate / period to a new rate / period without your agreement.

 

[Token Funder]

I had no idea that a bank could unilaterally change a contracted fixed rate / period to a new rate / period without your agreement.

They didn't

 

[Ms Jade]

Do you know something about this that I don't know, TF, or did I somehow end up in Bizarro World too?
(Not unusual, but more often happens later in the evening )

 

[ianvestor]

2. Get a whole new 2nd loan on the property (leaving the fixed one in place) to access the equity.

For cheap properties, be aware that a new loan usually has to be at least $20,000. So this strategy won't quite work if you're trying to access $19,000 of new equity, whereas top ups can usually be of lower amounts.