The business of rate forecasting is littered with the graves of those who got it wrong, but it’s safe to assume that, even after the controversy caused by the Commonwealth Bank’s decision to increase variable rates by 45 basis points, this is not the last we will see of rate rises in the next 12 months. There’s an emerging consensus that the RBA will lift rates by around 50 basis points over the next 12 months, but a possibility of as much as 100 basis points.
BY DAMIAN SMITH
What does all of this uncertainty mean for investors out there who are interested in purchasing an investment property? Fixed loans are usually popular with investors because of the consistency to help manage cash flow.
But with fixed rates starting to rise, it’s worthwhile considering hedging your bets and splitting your loan.
Just as you’d want your investment portfolio to be balanced with different kinds of assets and risks, so too can split loans provide a good hedge, especially when the path and pace of rate changes are uncertain. They can also help reduce the impact of interest rate fluctuations while also keeping the features and benefits you need.
Borrowers could benefit from locking in a percentage of their mortgage with a fixed rate, so if rates rise, that part of your mortgage won’t be affected for the fixed period. Then if rates fall, the portion of your loan that is variable may decrease too so your repayments will be less. Keep in mind however, if rates do rise, your repayments for the variable rate will increase.
By splitting your mortgage, you’ll be taking less risk and protecting yourself against possible rate increases compared to what you would if you decide to lock your entire loan to either fixed or variable.
Split loans can be more costly to begin with so make sure you compare all the details first. For instance, while some lenders don’t charge anything for a split loan application, others charge up to $675. You can also be lumped with a fee for each additional split – also up to $675 per split.
While splitting your loan isn’t for everyone and they do have their disadvantages, below are some tips for those who might consider this option and how you can use it to your advantage.
• First of all determine what percentage to allocate as fixed and how much for variable. A lot of people choose to split their loan in half, that way if rates rise at least they’ll be 50 percent better off.
• Just like regular home loans, you can make additional repayments to help you pay off your loan sooner and reduce the amount paid in interest.
• Most home loans allow you the option of splitting more than once but be careful as you could have to outlay a fee.
• You don’t have to use the same financial institution for each portion, so shop around and compare investment home loans.
• If you already have an investment property as well as a mortgage for your home, consider consolidating these then splitting the loan to better suit you.
• Finally, when you are searching for the right loans, don’t forget to consider all the fees involved. Because you’ll essentially have two or a number of loans, look for ones with lower setup and ongoing fees.
Damian Smith is CEO at financial comparison website RateCity (www.ratecity.com.au). He’s one of Australia’s most experienced internet and technology executives, with leadership roles in Australia, the US, Japan and the UK for over 13 years. Damian holds a Masters Degree in Public Policy from Harvard University.