Australian property tax and expatriate tax expert STEVE DOUGLAS explains what to weigh up if you’re considering fixing your interest rate.
Q. Interest rates in Australia have reduced, should I look at fixing my rate now?
A. On February 3, 2009 the Reserve Bank of Australia announced a further one percent per annum reduction in the official interest rate, taking it to the lowest in 45 years. When deciding whether to fix your interest rate it’s important to consider the following issues:
Will rates come down further? If you feel a further reduction is possible, wait. The ideal time to fix an interest rate is immediately before the start of the next rate rise cycle. This isn’t easy to predict, so it may be best to fix your interest rate when it suits your financial position.
How do fixed rates compare with the variable? Most loans have a generous discount against the Standard Rate, which is often a lower rate than the fixed option. Make sure you’ll actually be saving when choosing a fixed rate.
How long to fix for? Don’t fix for a period longer than you intend to keep the loan. If you’re thinking of selling your property or paying out the loan in a year, fix your rate for just one year. If you have a longer time horizon, choose the most affordable mix of rate and term.
Should I fix the whole loan? Consider a mix of fixed and variable. This allows you to reduce the variable component more aggressively, if that’s in your best interests. It may also help if rates decline further, as you’ll still benefit on the variable portion.
What are the tax implications? If you do benefit from a reduced cost fixed rate loan, make sure you assess your taxation situation. You may need to review your planning to adjust for the lower holding costs to avoid nasty tax surprises in the future. Remember, it’s better to have lower cost than lower tax.
The Australian property market has escaped the global financial crisis due to strong regulation and a mature lending market. Australian loans remain amongst the best in the world so it’s easy to find a loan which matches your long term objectives. Fixing your loan is a decision based on mental comfort and financial certainty, but common sense suggests striving for lower costs wherever possible!
Steve Douglas is the co-founder and Managing Director of Australasian Taxation Services (ATS), established in Singapore in 1995. ATS provides specialist taxation services to people of any nationality investing in Australian property, as well as Australian expatriates living overseas. Areas of specialisation include the Australian taxation aspects of property investment, as well as expatriate and migration planning.