Interest in Advance

I am in the process of purchasing a property at Newington here in Sydney. To offset some of the Navra wholesale distributions I am toying with paying the loan interest in advance and have been offered the following scenario by the Commonwealth Bank.

* 1 Year Fixed Rate 6.85%p.a.
* 2 Year Fixed Rate 6.79%p.a.
* 3 Year Fixed Rate 6.65%p.a.
* 4 Year Fixed Rate 6.79%p.a.
* 5 Year Fixed Rate 6.79%p.a.
* 7 Year Fixed Rate 7.32%p.a.
* 10 Year Fixed Rate 7.32%p.a.
* 15 Year Fixed Rate 7.32%p.a.

Can someone give me some guidance???? and to stretch the friendship, a recommendation on a property management in that area would be nice also

Thanks

Bob

 

Bob

Whether you should take a fixed rate will depend on a number of factors:

1) how long will you hold the property?
2) what other interest rate exposure have you got?
3) how much free cash flow do you have to cope with interest rate rises?
4) what's your view of where interest rates will move over the periods concerned?
5) will having a fixed rate loan restrict your flexibility to pay down debt (heaven forbid ) or refinance as required for the next deal?
6) does the relevant loan product have the features you need, e.g. offset account and line of credit?

Personally, I reckon 7-15 years is a loooong time to be fixing for...but if certainty of costs is critical to you then historically those are pretty low rates. Have a look at the Australian Bureau of Statistics website. There's a downloadable excel spreadsheet of interest rates since the 50s for comparison of where we are now.

Perhaps you could look at fixing part of your loan and leaving the remainder on a variable rate?

Just some thoughts to add to the mix.

Sorry can't help on Newington PM. Jacque?

 

Thanks Nigel,

I have a 15 year interest only variable on a townhouse at Randwick and that just rolls along, but a 15 year IO fixed is a long long time. My understanding is that interest rates stay low longer than they do at high rates. Hey isn't there an election next year, the govt will try and keep them low until then

Bob

 

Another problem with fixing for such a long period is that you may have\want to sell the property during the fixed period and there may be break costs (sometimes quite significant) to pay.

Having said that, the 3 year fixed rate looks quite attractive.

 

Yeah, I've been caught with that in my earlier investing career, from memory it was 3 months interest. Anyway, to make a long story longer I've opted for the 5 yearer...

Bob

 

Bob I have completed a few interest in advance deals for clients recently. I am surprised that the CBA didn't mention the discounts they offer for interest in advance.

For instance if you are looking at a 3yr fixed 6.65% and you qualify for a professional pacakge - you get a further 0.15% reduction ie 6.5% if you then pay interest in advance you get a further 0.2% discount ie a 3yr fixed at 6.3%, This may be only available through the broker channel not the Branch but if CBA is who you want to deal with and you have a contact ask them about the discounts available.

CBA also just finished a promotion late last week waiving the first year professional package fee of $300 - another incentive.

Others will offer discounts for interest in advance so go shopping or get a broker to do the leg work for you.

Jane

 

Lia

Thanks Jane,

Yeah. I get a further 0.2percent off the quoted interest rates but I wasn't aware of the waiver on the prof. package.

Thanks for you help

Bob

 

No problem there is some confusion over whether the waiver is in place currently or not but - the prof package gets you the 0.15% disc to add to the 0.2% discount you get by paying the interest up front.

Jane