Fixed or variable?

PORTFOLIO POINT: The prospect of positive returns on property investment makes a compelling case. But how to structure the loan?
It’s almost two decades since investment property could be positively geared. The last time Australian interest rates sank to a level where property could be financed on a positive cash flow basis was the early 1990s. Back then, fixed rate home loans were virtually unknown.

Today, they are widely available and investors need to make two decisions: whether and when to fix.

Shaun Cornelius, chief executive of infochoice.com, an independent financial comparison site, says that this is a good time to lock in a fixed rate home loan. “For the variables to be a better deal, cash rates would have to drop about 1% in the next 12 months, so fixed home loan rates are looking pretty compelling.”

Frank Lopez of Canstar Cannex, a research service specialising in business and financial comparison, suggests that even though the rates may drop a little more, now is a good time to fix. “If I were looking for more than a five-year fixed loan then I would lock it in now,” he says.

He suggests that any further official rate cuts will be smaller than those already made. “Even for the short term loans it’s a good time to commit; now is a time to know exactly what is coming out of your account.” Lopez expects variable rates won’t get any lower than 4%.

Still, some experts say rates may fall further, possibly to about half their current levels. Many economists believe official rates will drop from the current 3.25% to 3%, which would bring basic variable rates below 4%.

“Hypothetically, even if the Reserve Bank goes right down to 0%, we will see rates at 2%. That 2% is just the bank covering its savers,” Lopez says.

For the record, with most variable rates hovering around 5.2%, the lowest three-year fixed rate in the country is 5.19%, found at both Newcastle Permanent and HomeSide Lending. The lowest five year fixed rate is 5.8% from Laiki Bank. Also worth a mention is RAMS Home Loans, with five years fixed at 5.99%, a larger company than other lenders with rates this low.

Small players offer exceptionally low rates, but 95% of all new home loans are written by the major banks. The rates offered by the major banks are presented below.

The big four banks – ANZ, Commonwealth, NAB and Westpac – although not as aggressive as the smaller lenders are also offering some low rates. NAB has the lowest, with a one-year fixed rate of 5.09%, three years at 5.29% and five years at 6.29%. The steepest rates are coming from ANZ: its one-year fixed rate is 5.99%, with three years at 6.19% and five years at 6.84%.

So how should the investor decide whether to fix or to stay with variable?

First, it is worth noting that it is possible to have both. Frank Lopez says it is not uncommon for borrowers to opt for a split loan, with fixed and variable components. “These deals are for people who want to both gamble on the variable rates but also want the stability given by the fixed rates.” Lopez says that now is as good a time as any to go with one of these deals.

However, if you decide to fix, the issue is that you’re tied to that deal for a stretch of time in which a lot can change.

Shaun Cornelius gives a guide: “The question is how much volatility the buyer can tolerate. If a slight increase is OK then the variable is a good choice because it’s more flexible and the rates have been tipped to drop again. On the other hand if you don’t have a lot of room to move then the fixed rates are the way to go. They give that consistency and peace of mind that a lot of people really value.”

Another growing trend among banks and lenders is offering a discount on a variable home loan rate if you bundle the loan with a credit card and a transaction account. A discount of 0.7% off the variable rate is possible by signing up for the package deals. Frank Lopez explains that it is a trend we will see more of.

“So far ANZ and CBA have been peddling the most of these deals,” he says. “Speaking broadly, people who take out these loans can save between $500 and $1000 a year.”

The upside for the bank of course is that they’ve given you a new credit card and the use of that card will boost fees. “If you’re cautious and responsible then these can be a good deal,” says Lopez.

Whether to fix or not is a personal decision for every investor but with record low rates and healthy yields – of 4–5% in well-located residential property – the option has rarely been so attractive.