With the official cash rate at an historical low and the possibility of more RBA rate cuts on the horizon, this is possibly the most frequently asked question of professional mortgage brokers today. Often the question is focused on the timing, with consumers asking if now is a good time to fix their interest rate, or if they should wait to see if interest rates fall even lower.

However, saving money on interest is not necessarily the most important thing to consider if you’re thinking about making the switch to a fixed rate loan. In this article, we talk about the pros and cons of fixed interest rate loans and the real reasons you should consider using one.

What is a fixed rate home loan?

A fixed rate home loan allows you to lock in an interest rate for a fixed term, which means your loan repayments stay the same during the fixed term even if variable interest rates should rise. It allows you to plan exactly how much your repayments will be for the life of the term, making budgeting easier and this is the major benefit of a fixed rate home loan.

Usually you can choose to fix the interest rate on your home loan for a term between 1 to 5 years. After the fixed period ends, the loan usually reverts automatically to the standard variable rate unless you refinance your loan to another product or negotiate another fixed term.

Is switching to a fixed rate product a good interest saving strategy?

For some people, the motivation for switching to a fixed interest rate product is primarily to save money in the event of an interest rate rise. These home owners are looking for ways to save money on interest any way they can over the life of their loan. Their strategy is to go with a variable rate product for now so they can pay the lowest interest possible in the short-term, then switch to a fixed interest rate product to keep their interest rate low when interest rates look as though they are going to rise.

Basically, they are interested in locking their interest at the lowest rate possible when it is most prudent to do so. That’s why we are always being asked if ‘now’ is a good time to fix.

The problem with this interest savings strategy is that no one can accurately predict interest rate movements. That makes it very difficult to know when it might be advantageous to switch, or even if switching will have the desired effect of saving on interest. How do we know when we will save more by using a variable rate product and when we will save more by switching to a fixed interest rate product?

There is really no way to tell. In order to save money on interest by switching to a fixed rate product, variable interest rates would need to rise well above the interest rate you are paying on your fixed rate loan (and fixed rate loans usually carry a higher interest rate than variable rate loans). You also need to consider that if interest rates should fall during the fixed interest term of your loan, you will be missing out on any interest savings you would have received if you had a variable rate loan.

Consider your financial circumstances before making the switch

The decision to switch to a fixed interest rate loan should be influenced by other factors besides the possibility of any substantial saving on interest. The point of a fixed interest rate loan is to help you budget your household expenses more effectively, particularly for the first few years you own a property when your finances may be tight and budgeting may be difficult. As an added bonus, you are temporarily protected from interest rate rises. If interest rates do increase during the fixed interest term of your loan, you will have until the end of the fixed interest term to plan how you will manage to cover the increased payments on your loan when the fixed term ends.

Switching to a fixed interest rate loan may not be a good idea if you need flexibility. If you are planning to sell your home in the near future, increase your loan or redraw from it, make extra repayments or refinance to access equity, staying with a variable rate home loan could actually save you money. Fixed rate home loans usually have sizeable penalties if you need to make changes or pay off the loan during the fixed term of the loan, which could cost you many thousands of dollars.

The split option is designed to help you hedge your bets

Many lenders offer a home loan product that gives you the capacity to split your loan between both the variable and fixed interest rate options. This could give you the advantage of partial protection in the event of interest rate rises, but could also offer you facilities like an offset account which could be very beneficial if you are a good saver, plus the ability to make extra repayments and redraw them if you need to.

It is important to remember that with a split loan, you are still locked into the product for the length of the fixed rate term. If you needed to sell your home or repay the fixed portion of the loan early for any reason, you would still be required to pay a stiff penalty.

To find out if switching to a fixed interest rate loan is the right move for you, it is a good idea to talk to a professional mortgage broker about your personal financial situation and goals. We’re here to help you understand which products are right for your needs and help you to choose an option that saves you the most amount of money possible. Call us today.

At its September meeting last week, the Reserve Bank of Australia (RBA) decided to keep the official cash rate on hold at 1.50 per cent. The decision came as no surprise to analysts as the RBA cut the cash rate by 25 basis points just last month, bringing it to all-time lows.

Positive economic growth figures for the June quarter of 3% combined with improved jobs and salary growth data, indicate the RBA’s easing measures are starting to have the desired effect. Whilst the RBA would prefer the Australian dollar to be weaker against other global currencies in order to stimulate growth in our export markets, the US Federal Reserve is tipped to be considering an interest rate rise at their September 20 meeting this month. This could potentially create a downward trend in our dollar, eliminating the need for further rate cuts from the RBA this year.

Following last month’s RBA rate cut, lenders have been reducing interest rates on a wide variety of owner occupier home loan and property investment loan products. However, some have only passed on part of the rate cut, which prompts us to motivate you to check your interest rate with us to see if you still have the most competitive loan product for your needs!

Activity in our largest property markets is already picking up after the Winter slowdown. Victoria held 826 auctions during the week ending September 4 and achieved a clearance rate of 79%. NSW also had a big week with 715 auctions and an 84% clearance rate. Other markets were slower to respond to the arrival of Spring, with QLD holding 135 auctions with a clearance rate of 58%, SA 73 auctions with a clearance rate of 81%, and ACT had 76 auctions with a clearance rate of 78%.

The Perth and WA property market has been quite weak for some time and the trend is expected to continue during 2016. For the first week of Spring only 26 auctions were held and they only achieved a clearance rate of 17%. NT and Tasmania have also been slow to get started, with NT holding just 6 auctions with a clearance rate of 40% and Tasmania holding 7 auctions which achieved no sale.

Home value movements were very conservative this month, with Sydney achieving an increase of 1.44%, Melbourne 1.49%, Brisbane/Gold Coast 0.47%, and Perth 0.20%. Larger gains were seen in Darwin at 4.07% and Canberra 2.77%. Adelaide saw a slight decline in home values of 0.96% and Hobart’s home values fell by 0.88%.

Many of you in the market to purchase a property this Spring have already talked to us about arranging pre-approval on your home loans. If you haven’t called us yet, pick up the phone and get onto it so you don’t risk missing out on the home of your dreams during the Spring rush! Rates are great following last month’s RBA cut so it’s also a good time to discuss your refinancing plans, fix your interest rate or get a home loan health check on your existing loan. Give us a call today!

That the high prevalence of rats and mice in Australian homes is a major factor in the distribution of food poisoning organisms like salmonella? Clearly, if you’re thinking about buying a property, the value of an independent building and pest inspection report can’t be understated!

Reduce your financial risks.

Buying a property can be a very emotional decision and it’s easy to forget about looking for defects when you finally find a property you love. But the reality is that all property buyers should obtain an independent building and pest inspection report in order to remain sensible and objective about the property they’re purchasing and reduce the risk of incurring expensive repair bills down the track.

A building and pest inspection report will provide you with a professional’s evaluation of the condition of the property you are purchasing. They will provide you with a visual review of all elements of the property including structural inspections of the exterior roof, interior roof spaces and eaves, foundations, subfloor, wiring, interior plumbing, sheds and pergolas, fireplaces, electrical and air conditioning systems. Your report can also cover things like windows, doors, flooring, ceilings and other temporary fittings and so on. If you have any particular concerns about a property you are looking to buy, you can mention them to your inspector and they will take special care to put your concerns to rest.

There are three good financial reasons why you should get a building and pest inspection report:

1. To check for structural and pest issues, so you are able to budget for rectifying them.
2. To use the information to negotiate a lower price, or for repairs to be completed before you purchase the property.
3. To find out if the problems are so severe that they may adversely affect the property’s future resale value, or be so expensive to repair that you may be put off purchasing the property entirely.

Ideally, a building inspection should be performed before you sign a Contract of Sale, or prior to auction if that is going to be the method of sale. When you’re not buying at auction, it is standard practice to insert a clause into the Contract of Sale stating that the purchase is subject to building and pest inspection reports.

Even new build homes can have problems.

Whilst it’s true that structural defects, termite damage and pest infestations tend to be more common in older homes, unfortunately even new-build properties can come with issues. If the property is new, paying for a fully comprehensive building inspection report is still a good idea because it will ensure that the building has been finished correctly according to the building plans and help you identify any problems the builder has overlooked or any issues that may not be covered under the building warranty.

When it comes to pest problems, these tend to be endemic to areas and their prevalence will have as much to do with where the property is located, as the property’s age. In many areas, homes under construction are extremely vulnerable to termite attack and other pest issues such as rats and mice.

A few hundred dollars could save you thousands.

Depending on the location and size of your home, a building and pest inspection report can cost anywhere from $300 for your average suburban home to $600 or more for larger properties or ones located in a rural location. However taking the precaution of getting a building and pest inspection report before you buy could save you a great deal of money and hassle.

When a professional building and pest inspector comes across a problem that may be significant, they will recommend you seek further advice from an appropriate professional before proceeding with the purchase. Depending on the nature of the defect and the extent of the damage, you can get quotes to make repairs or simply walk away from the deal if it is too hard.

For more information about locating a reputable company or qualified building industry professional to perform your building and pest inspections, please give us a call. We maintain relationships with many professional companies relating to the purchase of your home, so please don’t hesitate to get in touch for a referral if you require any assistance.

As an alternative option, more and more investors are investigating the merits of commercial property to help them grow their wealth. But what are the major differences between commercial and residential property investments? What do investors need to look out for?

Capital growth potential

Capital growth potential is an important consideration for investors, and this is one of the key differences between residential and commercial property. It is generally believed that the capital growth potential of commercial property is not as reliable as with residential property. This is because demand for residential property is growing all the time as the population grows, usually at a higher rate than the supply of new homes.

Generally speaking, demand for commercial property tends to be less and it is usually reliant on economic growth, rather than population growth. When the economy is in a growth phase, more new businesses start up and this increases demand for commercial premises and supports capital growth, but this generally occurs at a much slower rate than with residential property. Additionally, commercial property is more vulnerable during an economic downturn than residential property.

Rental yields

Whilst residential property may win on capital growth potential, commercial property may often be the stronger contender when it comes to rental yields.

For example, rental yields from residential property are generally around 3 – 5% per annum, which is much lower than with commercial property, which can often return as much as 5 – 12% per annum depending on your choice of investment.

An additional benefit of commercial property is that rental increases can often be written into the lease and may even be tied to economic factors. This makes it much easier to plan / anticipate the rental returns you will receive on your investment.

Tenant availability and security

Whilst rental yields may be higher for commercial property than with residential property, finding tenants may not be as easy. Commercial properties can often sit vacant for months or even years, particularly when the reason for the vacancy is an economic downturn or a long-term tenant has gone out of business. Finding new tenants may often require remodelling or refitting the premises, which can also pose an additional expense.

However, once you have found a good tenant for your commercial property, they do tend to stay longer and are less likely to default on the rent payments than residential tenants. Residential leases can be as short as three months, where commercial property leases tend to be at least 3 – 5 years or even longer.

Deposits

Commercial property investment entry price points may be extremely attractive to the smaller investor, however there are some disadvantages when it comes to putting down a deposit. Lenders are often much more reluctant to approve loans for commercial property investments and usually require a deposit of at least 30%. For a residential property investment, you can often get loan approval with a deposit as low as 5%.

Maintenance and other property expenses

This is another area where commercial property investment can often win over residential property investment. With a residential property, the investor is responsible for all maintenance costs and expenses such as repairs and operating expenses like the council rates.

With a commercial property investment, the tenant is usually responsible for all expenses including general maintenance, repairs and operating expenses such as rates.

A balanced investment portfolio is best

When it comes to deciding whether you should invest in residential or commercial property, we recommend that you look at each investment opportunity on its individual merits and do extensive research to determine both its capital growth and rental yield potential.

A balanced portfolio would most likely include a combination of both residential and commercial properties that have been specifically chosen to meet your personal investment criteria. A balanced approach will also assist in mitigating any risks associated with your investment over time.

If you’re considering a residential or commercial property investment, then don’t hesitate to give us a call. We’ll help you crunch the numbers to determine if the property you are considering will help you meet your investment objectives. We can also help you to get pre-approval on your loan so you can easily determine which properties meet your buying criteria.

What is ‘rentvesting’?

Everyone agrees that buying your first home is becoming increasingly difficult. The struggle to save up a deposit for your first property purchase is getting harder every year, with home values increasing by as much as 13% or more per year in major markets such as Melbourne and Sydney. The reality is that the longer you wait to buy a property, the more difficult it may become to save a deposit or borrow enough money to be able to afford to buy it.

For many people, being able to afford to buy a home in a location where they actually want to live is making the challenge more difficult still. With the most affordable homes often located in new suburbs or outer suburbs, finding a place you can afford to buy near to your place of work, family or required lifestyle amenities can be completely out of the question.

‘Rentvesting’ is a new buying strategy that’s recently emerged in response to these issues. It entails purchasing your first property as an investment rather than a place to live. Rentvestors typically purchase a property that meets their budget in a location they can afford, then rent a home in a location where they would prefer to live and work. It is frequently more affordable to rent a home in a popular location than it is to buy it, and this basic financial fundamental is what’s behind the rentvesting revolution.

Technically, you don’t actually have to be renting somewhere to be a ‘rentvestor’. The term also applies to many Gen Y first home buyers. This class of ‘rentvestor’ is typically living at home with mum and dad to reduce their living expenses whilst they save up a deposit for a property purchase. These savvy property buyers may continue to live at home with mum and dad even after they’ve purchased their first property, and perhaps even after they’ve purchased their second.

What are the benefits of ‘rentvesting’?

The primary benefit of the rentvesting strategy is that it allows you to get into the property market sooner. As every successful property investor will tell you, the sooner you get into the market, the sooner your property can start generating capital gains and the sooner you can start to build wealth.

The beauty of this strategy is that in a rising market, you may soon have equity you can use to purchase a second property that’s also in an affordable location. Again it probably won’t be a property you want to live in, but you’ll have two properties gaining equity as home values rise (potentially), two sets of tenants paying down your mortgages for you, and greater tax advantages as well.

Research is the key to a successful rentvesting strategy

Buying an investment property first means that you won’t have to compromise on the location when you make your purchase. This can also mean you can make investments that may return you the greatest capital gains. You can literally restrict your property searches to properties that meet your buying criteria of price, affordability and capital growth potential – a luxury that most owner-occupier first home buyers simply don’t have.

Careful and thorough research is the key to success with a rentvesting strategy. The property needs to deliver a very consistent income and at the same time, achieve steady capital growth. To succeed, you first need to identify a location that provides capital growth potential, then carefully consider the housing stock available within that location and choose one that will best meet your needs.

Call us to get started

As your professional mortgage broker, we’re here to help you assess your financial position and work out what you can afford to invest. We can also help you with up-to-the-minute property market data that could give you the edge when selecting the right property for your means.

For more information about rentvesting, or for an informal chat about your plans with no obligation, please give us a call today. We’ll be happy to help you start rentvesting if it’s the right solution for you.