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Variable & fixed interest rate loans

Finance | Variable & Fixed Interest Rate Loans

We all know fixed is best when rates are in an upward trend and variable when they are moving downward, but how to know what they will do next? Do you lock in after five successive rate rises? Seven?

In the first part of 2008 rates rose for the twelfth successive time and that trend seemed unrelenting. Five months later, anyone who had locked in a rate at that point was now faced with paying up to three points above average market rates.

Generally, we advise clients to hedge their bets by splitting the loan between fixed and variable rates, but we would not recommend a 50/50 split for all clients in all circumstances. Considerable expertise goes into determining the best mix for your particular circumstances, taking account of broader economic indicators.

Loan Restructuring

Often restructuring is advisable when a client's financial situation has changed. Generally, though, all restructuring has the common objective of ensuring that as much of your total debt as possible is tax deductible.

When clients approach us for financial advice, we commonly discover they are carrying significant levels of debt in traditional (non deductible) home loans. We encourage them to pay that down as quickly as possible. Later, we restructure the loan to take advantage of the additional equity by securing a line of credit against the home for investment purposes. The loan remains at housing rates, but that portion servicing investment attracts full deductibility.

Lines of Credit

These are typically secured against a family home but can be used for business, investment or personal reasons. This enables you to secure finance for these purposes at housing rates.

Lines of credit can provide great flexibility for an investment strategy. It would be quite common for a finance plan to involve various investments at variable points of time. A Line of Credit ensures you have immediate access to funds when you need it, and you don't start paying until you use it.

Split loans

The most obvious reason for a split loan is to hedge against interest rate movements by incorporating both a fixed and variable rate portion.

However, loans are also split according to purpose. For instance, a $500,000 home loan might incorporate a $200,000 conventional principal and interest loan with a $300,000 line of credit for investment purposes. This keeps your non-deductible and deductible debt separate, making tax compliance easier and cheaper.