New Loan - Fix 5 years, Variable or Split?

If you got a new loan next week, would you go Variable, Fixed or Split?

  • Variable

    Votes: 82 82.8%
  • Fixed

    Votes: 7 7.1%
  • Split

    Votes: 10 10.1%

  • Total voters
Wrote another post about a few things but getting great advice on how to structure new and current I thought I'd create a topic specfically on loan type.

I will be taking out a new loan for an investment property I have just purchased. It will be IP for 5 years before becoming PPR...and my current PPR will become IP.

Considering there is a good chance the lenders will be raising interest rates before the RBA makes a move...and rates are looking only up from the consensus for a new loan for settlement in late October to be full variable, full fixed or split?

What I'm thinking is, it's around 2 to 2.5 percent difference between a discounted variable and a 5 year fixed loan today. That's a $12K gamble per year based on a $600K loan but decreasing depending on how much and quickly rates rise.
Hi noisuf

I'm a great believer in swings and roundabouts.

I fixed a loan in 1994 and the variable rate promptly fell. On the advice of the Bank Manager, I fixed again in 1996 and the variable rate fell further.

I haven't fixed a loan since then.

2008 was not a great year for variable rates and many people got spooked and fixed .... and now find themselves paying well over the variable rate.

If you fix now, you will definitely be paying more, sooner, than if you choose variable.

If you split and fix half, or a third, you will be hedging the impact of the fixed portion - you could arrange your loans in such a way that you are paying equivalent to the Standard Variable Rate now but then again, why pay before you have to?

There is no easy answer, and there is a fascination with interest rates, but pleased though I am that rates are where they are right now I am not crossing any bridges until I come to them. The bridge may be a lot further away than we think - or we could be standing at it tomorrow

In the meantime, the variable has a long way to go before it is at the current fixed rate offerings .....

Life itself is variable, and once you fix the rates you are looking at significant penalties if you have to make other plans.

Measure twice, cut once.

You can be lucky with fixed rates.

Daughter bought a house in 2003, fixed for 5 years at 6.4% or so. She sailed through the ever increasing interest rates. When the fixed rate was about to expire (August, 2008) we advised her to go variable, so she then caught the downhill run. Just about the entire time her fixed rate was below the variable rate.

Others have not been so lucky.
What I'm thinking is, it's around 2 to 2.5 percent difference between a discounted variable and a 5 year fixed loan today. That's a $12K gamble per year based on a $600K loan but decreasing depending on how much and quickly rates rise.
The market is expecting the RBA cash rate to increase by 2.0% within 12 months. I'd expect the banks to add another 0.25%-0.5% onto their margins within that time, so a likely total rise of 2.25%+ by this time next year.

If you fix today at 2% above your variable rate then you should expect to endure the pain for only 12 months. If you value SANF highly then I'd be fixing for 5 yrs, as the pain will be short lived relative to the 5 yrs of SANF. It's fairly unlikely that you'll save $$$ by going fixed over variable.

Of course, the best time to fix was 6 months ago when rates were 1.25% lower (there was blood in the streets)... the fixed rate horse bolted a while ago :eek:. the consensus for a new loan for settlement in late October to be full variable, full fixed or split?

The consensus of the money market is in the graph KeithJ posted.
Somersoft appears to be split 5050 re fix vs var.

I'd suggest you question why it is better to follow the consensus, as it was the consensus to fix in 2008 for >12mths.
Thanks for everyone's replies so far.

Interesting that in 12 month's time, it's projected to get to the neutral zone of growth vs retraction. So it sounds like the market feels that the economy is definitely picking up and will be back to good growth in a year.

I do have in mind what I want to do. I didn't know what SANF stood for until I did a little search. I do value SANF...but my brain tells me to go the other a lot of people will be in dire straits if that market curve kept on going up after a year.
Fixed or not fixed

We have run with fixed for almost all of our investing years. Recently we are variable.
For many years knowing the budget was more important than any other factor. So we were part of the 11% (?) of borrowers who fixed.
It just happened that 7.25% was the highest we fixed at.
As mentioned above there was a moment not so long ago that this policy would have locked us into 9.25% and made this year very un settling.
Just luck that we were not forced to make that choice.
Thanks for all the polling everyone!!!

I feel for the people who took up the bank offers/letters to fix at much higher interest rates...
Interesting to see that some lenders are now offering capped rates where they offer a variable rate loan with a cap on the maximum rate over a given period of time.
Fixing rates is mostly a piece of mind issue, not a bet on whether you can out think the banks. There was some research down (a few years ago now), that showed for that for over a few years, that you were better off being on variable rates rather than fixed.
If you want to iron out the flucuations, go fixed. Otherwise, go variable.

Fixing rates is mostly a piece of mind issue, not a bet on whether you can out think the banks.

How does everyone think about this now that it is October? Back when this topic was created it was August.

Anyones feelings changed about fixing their rates?

Yeah im starting to think about my SANF and whether or not I could handle it when the IR's start to go up. I just dont know how far they are going to go.

If they get to 8% how long will they stay there kinda thing?

I did some calculations. 8% is just about all I could take in the way of repayments. I'd be stretched at 8%. I'd be able to handle it but it would be tough. Cos I dont know how long it would take to increase the rents to help cover some more of the repayments. This is why im seriously thinking about getting a 7.09 % 3 year fixed with ANZ for the SANF, so that I know I will be able to afford the repayments more comfortably now and in 2 years time too. You could go worse than 7% fixed IR!

I'm curious just how long IR stay at a higher level. Anyone know, going on past history. How long do they stay high and when do they fall and why?
i think banks will shortly start to reduce there margins

I'm curious as to what their motivation would be to do this? Historically banks are always looking for ways to spread their margins, and the last 12 months has been an absolute gold mine for their margins, with the great securitisation experiment (temporarily, hopefully) been declared a failure.

The "Big 4" is essentially the "big 6" with St George and Bankwest under their banner (does Homeside count as a seventh? Don't think so...), and the next 7-70 banks writing about 8% of all loans, the chances of these guys reducing their margins is slim at best...
Well its a tough question but what can you do?

At present, fixed rates are
3yr 7.6%
4yr 7.8%
5yr 7.95%
6yr 8.25%

Between a rock and a hard place.

I'm one of those that may struggle if rates keep moving up.
But I also know that leaving half my rates variable is the difference of around $15,000 per annum for now. But with rates to hit 7% within the year I may be working 7 days a week, plus night shift.. :eek:
Just got this analysis from a Margaret Lomas' newsletter...Not a bad way to look at it.
In my books, it's the Banks who want you locked in, (knowing u wont break, cos the costs are so high). They keep their customer for the period, that's their main reason for dangling the carrot.

Let's consider a $200,000 loan, with a current interest rate of 6%. We will assume that the standard variable rate is 6.7%, and that this rate is a discounted rate, since these days most borrowers can access a discount of around 0.7%.
In the main a fixed rate will be around .7% higher than the variable, which means it will also be around 1.4% higher than any discounted rate you may be able to access. On a $200,000 loan, this means that $233 more in interest is paid each month.
Imagine that you take a fixed rate for 2 years. During that time, there is a rate rise every three months of .25%, meaning that a total of 1.75% (first 3 months at 6% then a rise each three months) in the 2 year period is added to the variable rate (and your discounted rate).
Total interest on the variable rate loan of $200,000, given the increases, is $27,495. After tax breaks of 30%, the investor pays a net of $19,246. During that time, even after 5 rises, the rate on this loan was still less than the available fixed rate. For 6 months it was more. Total interest paid on the fixed rate loan is $29,600, or $20,720 after tax breaks.
In order to make fixing worthwhile you would need to see a rate rise of more than 2.5% more than the current variable for at least half of the period in which you are taking out the fixed rate. So, for the example above over a two year period, the variable would have to be higher than 7.4% for at least 12 months to make this strategy pay off.
It's always worthwhile doing your sums first rather than simply acting on a whim. I am not expecting a rate hike of any more than 2.5% in the coming 2 years and so fixing is a gamble to take.
If, on the other hand, you feel better when you have some assurance, by all means fix, and see the extra you may pay as insurance for you