Investing in first IP & Interest rate rise

Hi Mike,
Re this :-

I’m looking at an Interest only loan and a 90% LVR. Is this a wise decision with rates likely to rise in the next couple of years or worth going for a 20 deposit or 80% LVR.

Borrowing the maximum you can borrow allows you the maximum flexibility. A smart move would be to set up an Offset account against the Mortgage account – into this, you can CHOOSE to add an amount per month that brings your SANF (Sleep At Night Factor) under control. e.g. you might choose to pay an amount of Interest as though you have a P&I loan at 80%. This might be an extra $400 a month (say) so you “pay” this extra into the Offset.

The act of adding funds to the Offset means that you owe LESS Interest as your funds accumulate in the OFFSET account. Since it is all your own cash, it can be removed from the Offset at any time, and for any purpose.

That purpose could be –
1. To actually PAY DOWN the mortgage you still have on the IP (not what most would choose, but at least you can learn that this IS an option – and THAT can help with SANF too).
2. You might have found another “deal of the century” and you need to lock it up with a Deposit paid immediately.
3. You can take a world trip if you wish.

Go here :-
https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/#post-4697973
….. to read a heap more about Offset accounts – learning of these is well worth your time !! ;)

Benny

PS One other option might be to Fix the Rates now. With talk that Interest Rates may be about to drop further, this may work against you, but then you can be CERTAIN that the payments WON’T rise in the next x years.

The WORST time to fix is after they have already risen, and we panic and fix just so our payments can’t rise EVEN MORE. That is a super-bad time to fix, and this kind of action caught many in 2008 after KRudd was made PM, and famously quoted “The inflation genie is out of the bottle” – leading to the RBA increasing rates as the rest of the globe were madly CUTTING their rates. Our rates got to 9% thanks to KRudd – and some homebuyers then FIXED in case the Rates went even HIGHER. They didn’t (and shouldn’t have gone up at all) and these folk were left with Rates fixed at 9% while the rest of us got to see around 5% by year’s end.

So, don’t be in a rush to fix – but, if you wanted to, now is not such a bad time……

Buffer account.

That’s the answer to everything. SANF and everything.

I work with peers earning at least $100,000 a year, and when the pay is a day late, which it actually is on time, they’re used to it a day early, anyway, when it’s late by their expectation, the clamber about and huff about bills and other expenses…

Whatever, no matter your income, no buffer, you’re in the poo.

Buffer can be an offset account (super good as it reduces interest). It could be in any form. 95% to 50% LVR is irrelevant, what are the multipliers, how many pays can you miss before it hurts? That’s the question, you gotta be able to tread water a while.

As others have stated offset account is great for having flexibility. Also if you can get to 88 lvr the lmi drops a bit. Congratulations on your first ip when’s the second, third and fourth coming :)