So, you’ve made the decision to begin or expand your investment property portfolio. You’ve taken into consideration the location, projected capital growth, annual return and price range and you need to work out the best finance option.
Assessing whether fixed rate, variable rate, interest only, principle + interest, interest in advance, split loan facilities are suitable for you personally is a subject worthwhile thinking about as the right decision could save you a fortune in the future.
Why should I fix my rate? No one can ever really accurately forecast where interest rates will be in the next few years. Right now it looks like they are trending downwards due to the global economic downturn but trying to second guess the global economy is never a good idea.
Fixed rate mortgages deliver certainty of cash flow. You know exactly what you’ll be paying for the term of the loan.
Given that your rental property returns should increase by at least the rate of inflation.
Ie. 2-3% per year, your situation is guaranteed to improve year after year.
The current differential between variable and fixed rates is about 1.12% per year.
(6.86% minus 5.74% = 1.12%)
On the surface this looks great as on a $500,000 loan this is an annual interest saving of $5,600. Sounds great until you factor in the market offering of up to 0.85% discounts currently being offered by the banks then this saving shrinks to 0.27 of 1% or a modest $1350.00 per year saving. You do the math!
Why pay interest only?
Cashflow. Pure and simple.
On a $500,000 loan the difference per month is $496.80 ($3,000.97 – $2,504.17 = $496.80)
Not a huge amount unless you have a multimillion dollar loan.
What does an “interest in advance loan” mean? Tax reduction.
This allows the borrowers to pay up to 12 months interest as a lump sum in advance enabling a tax deduction from that financial year.
What are split loans?
Having your cake and eating it too!
This is where part of the loan is on a current variable rate and part is on a fixed rate. The good part about this product is that you get the cashflow benefit from the fixed portion if rates increase over a say, five year period. It also allows you to make increased repayments on the variable portion to pay off your loan faster.
(Article complements of Espresso & The loan market – August edition)