Promoted by Loans.com.au
Australian borrowers last year were able to take advantage of some of the lowest fixed home loan rates in history, but that is slowly starting to change as fixed rates rise again.
Much of this is due to two things: The Reserve Bank dropped its 2024 forecast on the cash rate increase, and APRA increased its availability buffer from 2.5 % to 3.0%.
As a result, banks and lenders responded by raising interest rates largely on their fixed offers, with variable rates remaining largely unchanged or reduced.
If the current trend continues, variable rate loans will become cheaper than fixed rate loans.
This is important because fixed mortgage rates have been significantly lower than variable rates throughout the pandemic, leading many borrowers to lock in their rates. But now that the interest rate cycle begins to reverse, investors who have yet to set their rate could face a sharp reduction in their free cash flow.
Even a small increase in interest rates can be significant because interest rates start from such a low base.
What Should Investors Do?
Even with fixed rates rising, investors need to make sure that a fixed rate is right for them. Lenders may restrict additional repayments on fixed loans or charge a break-up fee if there is a change in your circumstances, such as the sale of the property or a change of lender.
If you are planning to access equity in your property to build wealth in the near future, locking yourself into a fixed rate may prohibit you from doing so, unless you pay a fee. exorbitant rupture.
That said, fixed rates have a lot of advantages. The main benefit of a fixed rate is the certainty it provides. A fixed rate means that your interest rate is locked in for a period of time, typically between one and five years. This means that your repayments are also blocked, protecting you from possible interest rate hikes.
Blocking your repayments means you have cash flow security and can budget accordingly for the period you set. However, the cash impact of a higher interest rate on your Principal Residence Loan (PPOR) will be greater than on your investment loan due to the tax deduction that you benefit for investment debt.
For example, if the interest rate on your home loan of $ 600,000 were to increase by 1%, the impact on cash flow would be $ 6,000 per year
However, if the rate on your investment loan of $ 600,000 also increases by 1%, the impact on after-tax cash flow is $ 4,000 (after tax deduction).
Since investors typically have a greater ability to resist a rise in interest rates on their investment loan, it may be a good idea to consider securing first your mortgage rate for your PPOR.
On Loans.com.au, we offer a Smart Booster Investor Bundle which allows you to combine your home loan with your investment loan. You also have the option of splitting this loan with one of our low rate fixed loans.
If you already have an adjustable rate mortgage and are concerned about your ability to repay if rates rise, but still want the flexibility of an adjustable loan, you may consider securing a portion. of your interest rate (a split loan) sooner rather than later.
Ultimately, if you're worried about rising interest rates and the impact it will have on your cash flow, you should do your homework now to protect yourself.
The good news is that right now lenders offer great fixed interest rates.
At Loans.com.au we offer competitive fixed rates. Check out our fixed rate mortgage loans.
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Marie Mortime r is the Managing Director of Loans.com.au, one of Australia's largest online lenders. Since Marie started the business 10 years ago, Marie has made Loans.com.au into a business with $ 6 billion in home and auto loans. Marie is dedicated to improving financial literacy for all Australians and is passionate about the FinTech industry in Australia. When she's not at work, she enjoys spending time with her husband and two young children.
loans.com.au is an online lender for home and auto loans. For 10 years, Australians have trusted the local Loans.com.au team to support them with low home and car loan rates, approved quickly through the online Loans.com app. at .
