Fixed Home Loan Option As Interest Rates Head Up
Sun Herald
Sunday June 3, 2001
Weighing the risks
I'VE bought a second house as an investment with a loan of $120,000 over 20 years at a variable rate of 7.45pc. Rent less loan and agent's costs gives me $245 per month to negatively gear. In view of falling interest rates do you think it is the right time to lock into a fixed rate for a period?GB, Lake MunmorahYour property provides a loss of $245 a month or $2,940pa. However, don't forget that the whole loan repayment is not deductible, only the interest component.
I estimate that your monthly repayments are $963, of which the interest, in the first few payments, comes to around $745 a month.
I think that we are in for a period of rising interest rates; largely, I suspect, because inflation is likely to take off. There is little awareness that both long- and short-term market rates have been rising quite strongly in recent weeks.
At present, fixed-rate loans over two years are roughly equivalent to variable rates while fixed loans over three years are approximately 0.25pc higher, and add another 0.25pc over five years. You are also faced with the prospect of a new entry fee into a fixed mortgage and, if it is a $600 entry fee, this represents 0.5pc of your loan.
Once you start looking at three- and five-year fixed mortgages, you are gambling that, by paying more now, you will save in the long run. That is a fairly high-risk gamble, as forecasts on rates tend to have a reasonably high chance of error.
If you fix half of your loan for three years, you need to see rates rise by approximately 1pc within 1.5 years that is, by November 2002 to make a profit.
If you fix half for two years, you need to see rates rise by approximately 0.3pc within one year (by June 2002) to make a profit, depending on the interest rate you receive.
There appears a reasonably small risk in fixing your mortgage over two years, unless variable mortgages fall in coming months.
MTM trust
WE have a parcel of 8,000 MTM units bought for $1.60 two years ago after an article in The Sun-Herald. Its price has since dropped to 25. What do you think the future of the stock is?MP, St IvesThat article covered floats on MTM, TAB and Macquarie LeisureWide Property Trust. Luck wasn't running your way. MTM was launched with much fanfare and the hint that the Packer organisation was behind it was enough to tempt people.
Since you wrote to me, Babcock & Brown (a local investment bank, 20pc owned by a German bank) has made a takeover offer at 34.5, conditional on 50pc acceptances. The directors are suggesting shareholders do nothing, but one report suggested a conflict of interest prevents them making a recommendation. I would be tempted to accept.
Best cash return
I WILL receive about $60,000 in the next six months and plan to buy a residential property. Where could I best place this cash so as to have enough liquidity to use this as a deposit, but also get a reasonable return for what is (for me anyway) a large sum. SC, North RydeFor just six to 12 months you should not stray from at-call accounts, or short-term deposits.
To keep your money at call, the optimum interest rate available now seems to be offered by what I call limited access accounts. Examples are St George's DragonDirect and ING's Savings Maximiser, both paying 5.25pc.
These funds can be accessed only by phone, fax or internet and will transfer money only to and from an existing cheque or savings account.
© 2001 Sun Herald