The experts clash! Where to go???



From: Bill Trainor

Hi everyone

For a long time I have been a huge fan of Jan's work. Five years ago I bought IP 1 with IO fixed for 5 yrs at 7.95%. Over this period I have paid more than I would have on variable however as Jan says 'you can still afford to smile'.
I am now purchasing another two properties, using LOC as 10% deposit & costs (inc LMI) & have been advised I can get a professional package rate of 6.07% via ANZ, or at IO fixed rate for 5 years, 7.35%. Both properties are cash positive, and the difference in the rate variance on about $460k loan is around $50 per week forgone in the pocket (call it 'opportunity cost').

I have also just read Margaret Lomas' book "How to create an income for life'. Margaret is a fin planner focusing on cash positive IP. She speaks harshly of fixing rates as it restricts cash flow. Jan says fix 2/3 of your portfolio to protect cashflow. My gut says to go this way as I am concerned having best part of $1m on variable rate. Not sure if my concern is valid but that is what the tummy is telling me!!

I would really appreciate anyone's advise on this area, as I need to finalise all of these loans next week!

Thanks in advance


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Reply: 1
From: Paul Roberts

API had an interesting article which compared fixed with variable, variable was ahead in cash flow over time. But this does not take into account personal comfort zones, that depends on your risk profile. I have a similar level of debt and am happy to maintain variable rates but that is a personal decision.
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Reply: 2
From: Nigel W

On 7/13/02 2:04:00 PM, Bill Trainor wrote:
>My gut says
>to go this way as I am
>concerned having best part of
>$1m on variable rate. Not sure
>if my concern is valid but
>that is what the tummy is
>telling me!!

Hi Bill

As with most questions, I think you know the answer already.

As another poster has rightly pointed out, the previous stats seem to indicate (with the benefit of hindsight of course) that sticking to a variable rate is cheaper in any given 5-10 year period. BUT this is a quantitative measure.

There is a qualitative measure which statisticians ignore...the "sleep at night quotient".

It seems to me that you'll be stressed if you don't fix some part of your loan - the question to ask is - how much is that stress worth? If you can eliminate that stress from your mind by paying a certain % premium on interest then maybe it's worthwhile for you...

I think this is why Jan advocates fixing some rates. You gotta be comfortable with whatever investing and financing approach you take. It's no good having your wealth on the fast track if you've given yourself ulcers and nervous discombobulation due to interest rate worries!

But only you can make the decision!

Good luck
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Reply: 3.1
From: Mark Laszczuk

To whomever,
Please remember that in the latest issue of API, Margaret Lomas condones buying negative geared property as long as the depreciation/tax benefits give you a positive cashflow. To me, this is NOT positive cashflow, this is relying on ATO presents to give you a positive cashflow. Any professional investor will tell you that you should not rely on tax benefits/depreciation in regards to returns. Please keep this in mind when considering Margaret Lomas' investing strategy.

'no hat, some cattle'
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Reply: 4
From: Tibor Bode


The more you read the more you will realise that there is no "single right strategy".
Just like people on this forum, the experts also have differing opinions. As I see the more I read from people on this forum as well as books it will help to refine my strategy, which will be good for me. It does not mean that it will be right for you or anyone else. For example I am very weary of negatively geared property at this point in time, I simply would not discard it as a part of my strategy when I consider it to be suitable to my specific portfolio. So, while I agree in principal with with Jan Somers as well as Margaret Lomas and also several other people, I try to learn from their view and experiences and refine my strategy. I have not read a single book (I don't believe i ever will exist) what told me everything I needed to know or what provided the "perfect" strategy.
So, I would simply take their view / opinion / facts into consideration and also would talk to some really competent broker or mentor who understands the ins and outs then I would define which way I am going to go. If you did your due diligence properly it is very likely that you will not go wrong.
It might not be the best for all occasions (then you simply adjust your strategy), but basically either will do the job. At the end of the day no one can tell you what to do, just help you with information.
I hope this help, even if this is not 100% you might wanted to hear.

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Reply: 4.1
From: Jeremy Laws

There are only very specific times in the last 50-60 years when fixing rates would have been better than variable. Variable also allows you minimum break costs if you want to exit. IMHO you should ALWAYS be variable, if only for maximum flexibility
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Reply: 4.1.1
From: Robert Forward

I can fully agree here with Jeremy. I feel that variable interest rates offer a lot more flexibility, especially if you need to sell the property for some reason or need to a refinance to gain equity out for further purchases. To me variable interest rates are easy to control because of these reasons.


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From: Ayesha Todd

I am no expert (far from it actually) but I feel it would depend on what your intentions are for the properties. For example we currently have two properties, one is fixed - it is a family home (family live in it - renting), not going to sell in the near future, not in a high capital area so no point in trying to get capital out of it in a short term, so suits a fixed interest rate. The second we don't really know what is going to happen in the way of growth, don't know if we are going to want to off load it in a year or two so it is on variable rate.
So my non expert advise, ask yourself what your intentions with the properties and hold.... possible sell in a couple of years.... refinance in a year or two after reno or growth....and then decide what type of loan suits best.
Please if I am way off track in my thinking, someone please correct me.

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Reply: 5
From: Brad Parker

Hi all,

My feeling is that rates will settle again in the near future and that if the worst happens they will settle even further again. I would be going variable with a view to fix when the rates have fallen again. Even with the debt levels you have stay flexible in the short term.


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