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Fixed interest rate ideas are in a spin
Monday, February 08, 2010
THE Reserve Bank's decision last week to leave the official cash rate on hold has put a new spin on the "fixed or variable'' debate.
Financial markets have gone from pricing in a cash rate of 5.5 per cent by the end of the year to pricing in a rate of less than 4.5 per cent.
That means variable rates are unlikely to rise by as much as was feared, and also that fixed rates are due to be repriced downwards.
While the decision of whether to fix or stay variable confuses everybody at some point, the pressure on owners of investment properties to get it right can be even greater because many have two mortgages to maintain.
However, experts say there are ways to minimise the impact of a rate rise on your investment property, but any increase on your principal residence has to be taken on the chin.
So, if you're going to fix anything, fix the mortgage on your family home.
"Broadly speaking, there is more you can do about rate hikes on an investment property than there is on your home,'' says mortgage broker John Manciameli of Mortgage Choice.
First, there is negative gearing the ability to add up all of your outgoings on your investment property, including interest, insurances and expenses, and offset a portion equivalent to your tax rate off your tax bill.
This doesn't help much with cash flow. So landlords who are struggling can apply for an income tax variation which enables them to have the benefits of negative gearing effectively added to their monthly salary.
"Investors can apply for a Section 221D variation, which allows you to provide the tax office with an estimate of what your tax position will be at the end of the year,'' says Yellow Brick Road director James Garnsey.
"The ATO will then contact your employer, who will deduct less tax from your pay cheque.''
Infochoice.com.au chief executive Shaun Cornelius says the premium to fix rates is just too high.
"If you look at three-year fixes you're paying about 1.1 per cent more for fixed rates compared to variable rates,'' he says.
"That is a big margin and not worth the extra cost.''
- Nick Gardner - News Limited Newspapaers
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