Interest only mortgage for 1st investment property - fix now for 5 years ?

R

ROSS

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Hi All

The above is self explanatory - just need a bit of direction. This is our first investment property - rent is covering repayments plus expenses on the property but only just - very tempted to fix with NIB for at least 3 years (4.44%) or maybe 5 years (4.65%). This is a long term investment for us - decided to this instead of AVC's. Kids may use house for college also. So we certainly wont be selling anytime soon. My only reservation is that the last time we fixed, BoS came in an shook up the market and we were left behind on a high fixed rate. Maybe this is a no brainer - but who knows what will happen - could rates come down again at some time over the next 3 - 5 years ??
 
It depends on how you view the affordability of the payments now and how much of your working capital you have tied up in the investment property. If you cannot live with increased mortgage payments, then fixing offers protection, but fixed rates are generally the most inflexible, and once you know the swap rate for the bank, generally the most expensive also.

On an interest only basis also you are depending on a rising market to clear the capital repayment on the house which is probably Ok long term (>7 years on average) and makes sense from a tax point of view. On the other hand coming near a general election at the top of a property cycle where first time buyers are priced out of the market, perhaps you should bear in mind the housing strategy of the next government could change the rules on taxation on rental income versus interest paid on a mortgage for investors, and gradual interest rate increases and capital gains tax changes could stagnate the resedential property market for some time to come. On that basis make sure you have invested wisely the capital portion of the mortgage which you are not paying off now, and make sure you try to get a better return on that versus what you will potentially loose on the cost of a fixed term mortgage, if you really need to fix.
 
Well, I am hoping that after 5 years or a bit more, that we will be in a position to go to a regular mortgage and start paying off the capital + interest. This is our nest egg I guess, either sell in 25 - 30 years to provide a decent lump sum or keep renting. The property is almost completed - we paid the deposit 6 months ago and the value has gone up 20k already. If the rental market goes stale in the short term, I feel we could still sell
 
Bear in mind that if you fix and then sell during that time that you will have to pay the breakage fee which could be quite substantial.
 
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