The difference between fixed rates and variable rates.
When it comes to getting a loan, things can really get confusing.
Should you fix rates? Will this allow you to make extra repayments? Should you funnel the extra funds into an offset account? Or should you go with a variable rate loan instead?
The thing is, fixed rate loans don’t generally allow you to make extra repayments. They don’t all come with offset accounts either.
Variable rates do allow more flexibility in making extra repayments and can also be linked with an offset account.
But, when you are building a property portfolio, the question is not so much about whether or not to fix rates, it is more about developing a strategy that can help you achieve your goals over the loan term.
Every great loan starts with a great strategy.
If you want to build a property portfolio, your loans should reflect this. Choosing features that fit with your plan of attack will help you achieve your goals and reduce costs along the way.
Before considering your loan options, it is important to look at your circumstances.
If you are just starting out, having an offset account could be a savvy way to keep that extra capital aside for your next purchase while also reducing the amount of interest you pay.
Fixing rates could be great if you are on a limited income, such as during maternity leave.
If you are close to retirement and consolidating your portfolio, you may want to pay off as much debt now as possible.
Asking the following can help you to identify whether fixing rates with an offset account is for you:
- What type of income do I earn? Is it regular or sporadic?
- Do I need the security of regular repayments?
- Where am I going with my investing? Do I need capital on hand to fund my next purchases or am I looking to consolidate my loan?
- Do I need the buffer of an offset account or would it be better to have a redraw facility?
While having an offset account attached to a fixed rate loan is a possibility, the two don’t necessarily go hand in hand.
Plus, not all fixed rate loans allow you to have an offset account.
It is worth considering whether pairing the two is worth the trouble of finding such a loan. If you think you will be able to make extra repayments, why not opt for a variable rate loan instead? These allow more flexibility and you aren’t locked into a fixed term. You will also benefit from rate reductions.
The downside of fixing rates.
A lot of people prefer the idea of a fixed rate loan because they see it as protection against rising rates. But there are several drawbacks that could negate the savings you think you will make by fixing. These include:
- Ongoing additional fees
- Exit fees if you break before the end of the term
- Being hit with a much higher rate at the end of the fixed term (the revert rate)
- Not being able to refinance or take out equity for the next investment opportunity.
How does an offset account work?
An offset account works in a similar way to your ordinary transaction account. You can deposit and withdraw money from it, have your income deposited directly into it, and access money from it with an ATM card.
However, unlike a regular transaction account, the balance of the offset account gets deducted from the principal loan amount. Interest is then charged on the subtotal.
For example, if Anna takes out a loan for $250,000 and she has $50,000 in her offset account. She only has to pay interest on $200,000.
The benefits and drawbacks of having an offset account.
Having an offset account attached to your loan can be a great way of reducing the interest you pay while also having capital on hand.
If your investment property is paying itself off, it makes sense to funnel savings into an offset account for the following reasons:
- You’ll have a buffer to pay for unexpected costs
- You can raise capital for your next deposit
- This allows you to reduce the amount of interest on your loan.
So, what are the drawbacks?
An offset account isn’t a standard feature of a loan. Often, it is only possible to get an offset account on a fully featured loan – which tends to have higher interest rates.
Offset accounts also come with extra ongoing fees. So, while you save interest on your loan amount, you may have to pay a higher interest rate and extra fees instead.
Ahh! So many things to consider!
There are so many options when it comes to choosing a home loan or an investment loan. If you jump onto a comparison site it is easy to choose the lowest rate – but how do you choose the best loan conditions?
If you want to build a tower of blocks, you can’t start with a rounded piece. Structuring your lending is the same – you need to start with the right loan in order to obtain further finance down the track.
Speaking with a finance strategist can save you time and money.
When you are investing hundreds of thousands into building a property portfolio, it really helps to engage the services of a finance strategist.
Not only will they find you the best loan for your circumstances, they will help you structure your lending so that you can keep acquiring properties in order to reach your end goal.
Getting approved for one loan is hard enough these days – imagine how challenging it is to get approved for six or more!