WHEN INVESTING IN Commercial property, one of the major attractions for investors is the cashflow available. And locking in a guaranteed cashflow, via fixing your loan can be an attractive strategy.
However, there are a number of things that should be considered, before deciding to fix your interest rate. Here are some of the most important questions to ask yourself when deciding.
How long you are likely to keep the Property?
If there is any chance you want or need to sell the property during the fixed period, then fixing is inadvisable to fix your rate – as the break costs on a fixed commercial loan can be extremely high. Fixing loans are for a holding strategy; and if you are an active investor, who is buying and selling regularly … it may be better to focus on loan flexibility.
What is the difference between the Variable and Fixed Rates?
Commercial loan rates are fixed according to the money markets and fixed rates are set largely according to analyst predictions of where rates will lead.
While fixed rates are generally set above the variable rate … there are times where the fixed rates can be lower – when the market sees rate reductions on the horizon.
Fixing rates should be looked at as an insurance strategy, rather than an opportunity to beat the market. And if the fixed rates are considerably higher than the variable rates, you should consider whether the added cost is worth the protection against future rate rises.
What is the Lease Term?
The end of a lease term is a time when you need some flexibility with your facility. And that’s because you may need to spend some money on your property in order to renew your lease or relet your property.
Therefore, it is not a good idea to fix for a longer term than your existing lease. If your property is not leased, it is usually better to maintain loan flexibility until the property is fully tenanted.
Are you planning to use the Equity in your Commercial Property?
Once again, commercial fixed loans generally lack flexibility. And if you are undertaking an aggressive buying strategy, you should consider the ability to further leverage against an existing property down the track.
Bottom Line: You need to carefully considering these questions – because they’ll go a long way to ensuring you make sound decisions on whether or not to fix your commercial mortgage going forward.