Need advice on breaking my fixed loan

Hi everyone,

I am a regular viewer on here but this is my first post so I hope you can all help.

I currently own a IP in Brisbane which I made a big mistake fixing for 5yrs at 8.97% :eek: (lesson learnt - dont always listen to the media). I did this because I was afraid of the double digit interest rates due to inflation.

It has been fixed for 1 year and 3 months.

The property is worth $320K-$340K. My loan is $247000 at 8.97%. It will cost $17000 (which I would add to the loan) to break the fix rate and return to a 5.05% variable.

Payments now at 8.97%: $1880 / month
Payments at 5.05% variable: $1111 / month

I know that the media is talking about interest rate rises but I have been doing a lot of reading on here that says this is all just media hype.

I would like to here what advice the SS community has to offer :)

Should I keep my fixed loan or break it?
 
You are going to have to sit down with a calculator and work out how long it will take you to repay the $17K at the lower interest rates.

Work it out on the present rate, then 1% higher, then 2% higher.

This will give you a true picture and you can proceed on what YOU think interest rates will do.

We broke a fixed rate loan in the early 90s as we worked out it would take 5 months to recoup the (then minor) break fee.
Marg
 
To make up $17K on a $247K loan over the remaining 3 years 9 months, you'd have to be, on average, 1.84% better off than remaining fixed.

($17K / 3.75 years = $4,530 pa, $4,530/$247K = 1.84%)

So the question is, are variable interest rates between now and June 2013 likely to average less than 8.97-1.84 = 7.13%?

If you could lock in a new fixed interest period at less than 7.13% for at least the 4 years - then you're better off paying to break. (I can't get a lower rate from my current lender, but you may be able to.)

If, on the other hand, you want to go variable and think that interest rates will average more than 7.13%, then you're better off to "suck it up" and stay on your current fixed rate.
 
I don't think there is much doubt that interest rates will go up from their current record low in the next 4 years, question is where to. Marg is spot on - do your calculations based on a number of future interest rate scenarios and make your decision based on this.

kaf
 
And just to make a quick note

Its not about lessons learnt...............You made the right decision at the time with the information available to you at the time.

If the GFC hadnt come along to dump rates where would we be possible still in 8s to 9s territory ?

ta
rolf
 
You also need to consider what happens after the five year period ends.

Based on your numbers, I'm guessing that the variable option is based on IO. Capitalising the additional $17k means you're paying interest on that $17k as a perpetuity (assuming you keep rolling over that IO).

You need to add the NPV of that additional interest into your calcs to assess whether you're better off breaking.

EDIT: Also, if your income is volatile and breaking changes the cf position of the investment, you need to consider tax implications as well.

Sorry, no straightforward answer.
 
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And just to make a quick note

Its not about lessons learnt...............You made the right decision at the time with the information available to you at the time.

If the GFC hadnt come along to dump rates where would we be possible still in 8s to 9s territory ?

ta
rolf

True ROLF....

But the RBA got it wrong big time.....U.S. capitulating Oct 2007 but our bald headed maestro telling us rates could go higher....so many fixed at these high levels.

End of the day, it was flippancy and massive miscalculation from a bunch of suits who don't get paid to look like deers in headlights.

The RBA didnt do us any favours and burnt a lot of people.
 
Dont forget to factor in negative gearing if you aren't living in it.

You will be able to claim more $$ with a higher interest rate so although a lower monthly repayment might save you gross make sure you take into account the savings after tax
 
claim the extra interst on the $17k and write off this as a capital cost over the next 3 or 5 tax returns I think, just like LMI and other bank fees. Its win win.....
 
wow thanks everyone for the advice. :)

claim the extra interst on the $17k and write off this as a capital cost over the next 3 or 5 tax returns I think, just like LMI and other bank fees. Its win win.....

Is this considered as a bank fee?? Maybe I should speak with my accountant in regards to this...

Dont forget to factor in negative gearing if you aren't living in it.

You will be able to claim more $$ with a higher interest rate so although a lower monthly repayment might save you gross make sure you take into account the savings after tax
Very true and yes I am negatively geared atm. However, I am trying to move my portfolio (which is negative geared as a whole) away from this strategy.

Work it out on the present rate, then 1% higher, then 2% higher.

This will give you a true picture and you can proceed on what YOU think interest rates will do.
Personally I believe interest rates will be 6% in 12 months 7% by 24 months... maybe we should do a pole on where interest rates will be in the short-mid term
 
Speak to your accountant about capital costs of break fees. I made the comment after reading a recent post about the same issue.
 
And just to make a quick note

Its not about lessons learnt...............You made the right decision at the time with the information available to you at the time.

If the GFC hadnt come along to dump rates where would we be possible still in 8s to 9s territory ?

ta
rolf

Hey, you made me feel better too Rolf! My breakcosts (as of earlier this year) were $45,000! :eek: I think I could wipe out my entire taxable salary in one hit! Quite obviously, it isnt going to happen but the interest rate is around 7.5%.
 
The way I look at it....

If u keep it, you will know exactly how much to budget for the remaining 4 years, assuming your income remains steady. If you pay it out you are guessing that interest rates will rise by how much over the next 4 years, 2%, 3%, 4% in order to get your $17000 back?

ANZ 5 year at the moment is 7.74, so u r about 1.2% out of the money (as I see it). Rounding that out, u r about $3,000 a year worse off than the current fixed 5 year rate. So that would take you about 5.5 years to recoup the difference ($17,000). I don't think you will get your $17K back if you switched to a current fixed rate (I'm comparing fixed with fixed as it seems to be the correct comparison to make, rather than fixed with variable, cos that would be even more of a guess), since u only have 4 years left to pay that off.

An as rates rise, u will feel slightly happier each time they go up, as the difference will be less.

The Banks make the break cost high so THEY can make money, not you.
Cheers,
John Bradshaw
 
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