To fix or not fix? That is the question!

The next question that is often asked is whether to have a fixed or variable interest rate on your investment loans. Before you make a decision like that you need to ask yourself another question:

Are you smarter than the banks?

If you believe you are smarter than the banks, first of all, make sure you don’t suffer from A&I Disease (Arrogance & Ignorance Disease – a cruel and crippling disease that costs many investors hundreds of thousands of dollars every year!). Remember this, the banks employ hundreds of highly educated people to keep an eye on the economy and try and predict what will happen to the Reserve Bank’s base interest rate. You see, to put it in very simple terms, the banks borrow money from the Reserve Bank at the base rate and then lend it to you and others at a slightly higher rate. The difference between the two rates is how they make their money.

Have you ever noticed that the fixed interest rate is usually higher than the variable rate? The reason for that is that if the bank is going to let you have a fixed rate, they need to cover themselves for the eventuality that the base rate may go up on them while you have a fixed rate. So they need to build in a margin for that so they can still make some money. That’s why they usually make the fixed rate a little bit higher than the variable rate.

On the odd occasion, you may see the variable rate higher than the fixed rate. What that actually tells you is that the banks think that the base interest rate is actually going to come down. So naturally, they want to encourage you to lock in at a rate that they expect to end up higher than the level they expect the variable rate to drop down to.

So as a rule of thumb, if the fixed rate is higher than the variable rate, the banks think rates are going up. If the fixed rate is lower than the variable rate, the banks believe interest rates are coming down. The bottom line is if you think you’re smarter than the banks, go ahead and fix your rate. Otherwise, leave it on variable and put the rest of your money into your buffer.

Now you may be thinking ‘But what if rates go up too much? I can’t afford to pay more, so I will just for the security of it’. Well here’s another strategy. Get an offset account and pay your extra cash there instead. An offset account is a bank account just like any other account. It has an account number and BSB number, but it works differently. It is connected to an associated mortgage account. When it comes time to charge interest against the loan account, they subtract the amount in the offset account from the amount owing on the loan and only charge interest against the balance.

For example, if you have a loan for $100,000 and an associated offset account with $10,000 cash in it, you will only be charged interest on $90,000 of your loan.

So if you can afford to pay more, why would you? Just pay the minimum required and put the rest into an offset account. The effect is the same, you are still reducing the interest on the loan, but you will very quickly create a large cash buffer to act as a safety net. If rates go up, then you can use the cash buffer to absorb that. But what if they don’t go up? Which is what happens most of the time. Then you get to keep your money in a place where you can get it readily in an emergency.In summary, we normally don’t fix our rates. The banks are smarter than us when it comes to that. We just get an offset account and pay all income directly to it, and then let the interest for the loan come out of there.

We know of some investors who have an interest-only loan with an attached offset account that has the same amount of cash in it as the loans they are against.

Why not just pay out the loan, you ask? Well, what’s better, being debt free and having no cash, which is what you would be if you paid the loan out with the cash, or paying no interest and having a massive cash buffer available for an emergency or another investment opportunity that may pop up? If you said the latter, you’re starting to think like a successful investor!

Success in Property Investment. THE BIG SECRET💰
Here’s the BIG secret to success in property investment. This one tip is going to make you hundreds of thousands of dollars more than you were probably going to make before you read this book! Seriously. The big secret is to buy where it’s booming! There it is. Simple as that! Seems obvious, doesn’t it? The number one mistake most investors make is to buy their investment property near where they live. Be honest! Where have you been looking until now? Where have you looked in the past?

There is always somewhere in Australia that is booming at some time. Don’t buy the house around the corner just because ‘it is close by’ and you want to ‘keep an eye on it’. That’s an emotional decision, not an investment decision! Besides, that’s why you hire a rental manager to manage it for you. It’s their job to ‘keep an eye on it’. For all the years that we have studied real estate investing, we have gone around and around looking for that one key secret to success. And sometimes we feel like such idiots for wasting our early investment years on buying in the wrong spots.

This is now a good point to insert a word of warning! When looking for an investment property beware of your local real estate agent and any property investment firm that tries to sell you a property ‘nearby’. Unless of course on the rare occasion, you actually live in Australia’s #1 boom location at that time!

They will give you a very convincing presentation about how their properties make excellent investments – of course, they will. It’s their job to tell you what you want to hear so they can sell you the property! Always be wary of anyone trying to get you to buy a local property that they have already got listed for sale. They could have a conflict of interest, don’t you think? Work out where you want to buy first, and only then look for properties in those areas. The quickest way is to ask property investment experts like us. But if you’re going to go somewhere other than us, make sure they are independent, do their own research, and aren’t just a ‘wolf in sheep’s clothing’ who are just trying to flog some development. If they sell their own properties, where do you think they are going to tell you to buy? Right where they are building of course!

There are very few property investment companies like ours in Australia that are truly independent and loyal only to you, but they do exist. It really is a full-time job just keeping up to date with the state of all the different property markets across Australia, so you really are crazy to try and do it all on your own. Save yourself the hassle and get some help.

Where is the property market booming? How do you know?
Some people believe that the property market in Australia is cyclic. In a broad and general sense, we think that is true. Generally, the market is led by Sydney and Melbourne and then it’s a ripple effect from there. People find it too expensive in those areas so they move to other areas, and in turn increase demand in the new location and it booms, so people move on from there and so on.

But boom locations usually have nothing to do with that cycle, and it is boom locations that you should be buying in if you really want big results.

One example of this general trend is Tasmania. Not a lot of people move to Tasmania, but when the rest of the country gets so expensive, people, especially retirees, soon realise that they can get twice the house and land for the same money in Tasmania. So they move there. In turn that creates demand and a boom follows until prices catch up with the rest of the country. But if you really want to do well in property, you can’t just pick good areas; you need to pick awesome areas! If you want to know where the awesome areas are, then here is one secret: follow large workforce movements.

If you have got large infrastructure spending by the government or big business, and it results in the arrival of a large workforce all of a sudden in one location, there will be a property boom of some scale. The magnitude of that property boom however will relate to the ratio between the existing population and the new workforce arriving.

For example, if you go and spend $18 billion in Sydney and create 15,000 jobs, the impact will be far less than if you did the same thing in a regional centre with a population of only 100,000 people.

If you can master the art of finding these places and buying there, at the right time, you will make a large amount of money very quickly. It really is that simple!

Discover a fresh perspective on property investment with us, where we offer insights that will reshape your understanding of this dynamic market!

~Integrity Team

PSST – you can also register for our weekly webinars to learn all the tips and tricks that have changed the lives of regular Australians.


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Legal Disclaimer: This information ('the information') is presented for illustrative and educational purposes only. It is not presented nor should it be treated as real estate advice, legal advice, investment advice, or tax advice. All investments involve risk and potential loss of money. If you require advice in any of these fields you should contact a suitably qualified professional to assist and advise you. Your personal individual financial circumstances must be taken into account before you make any investment decision. We urge you to do this in conjunction with a suitably qualified professional. Daimien Patterson, IntegrityX Enterprises Pty Ltd, and their associated trading names, companies, researchers, authorised distributors and licensees, employees and speakers do not guarantee your past, present or future investment results whether based on this information or otherwise. Daimien Patterson, IntegrityX Enterprises Pty Ltd and their associated trading names, companies, researchers, authorised distributors and licensees, employees and speakers disclaim all liability for your purchase decisions. You should do your own independent due diligence and seek the advice of qualified advisors before making any investment decision.