Hi All,
I have noticed in a number of posts lately that people are becoming worried about interest rates going up in the coming years.
I would have thought that if you buy properties that meet the 11sec rule (and in spite of what some are saying, they are out there) you should be OK and actually prosper. Some things that I think are in our favour are as I see it;
1. If you have a return of 10-11% you have got a handy buffer before rates catch up.
2. While rates are rising and people who are over comitted are bailing out, there will be an even stronger demand for rentals which may even cover rate rises.
3. Even though rates are rising your principal should still be diminishing (assuming P&I loan), which means that at the worst you could re-finance on a lower amount and go interest only for a while.
4. When the cycle turns again, you should have a great base to get in on the action as profits are once again there to be made and as properties appreciate at a rapid rate again, you have a great borrowing capacity.
I’m sure that there are other things that I haven’t even thought of as well as I’m new to all this. And there are probably some negatives, but surely there would be less negatives than positives. I would like some opinions. Or have I missed something.
Cheers
Hi Steve,
I tend to agree and as a broker I wish I had a dollar for everytime someone asked me if I thought rates were going to rise! If people are genuinely concerned then fixing part of their loan to ease the uncertainty is never a bad option either although personally I think variable does better over the long term.
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Mel
[email protected]yeah i would think variable would always win out in the end too, why would banks cut their profits short.. if you fix your rates at the moment you paying a good 1-2% higher than the actualy rate, rates normally only vairy 1/4 to 1/2 a % point at the most, so i cant see why anyone would bother locking in for 5 years, because if you have say a $100,000 loan at say 6% at the moment and paying off around 10,000 a year..
i’m only young(there for dont have knowledge of history) but i dont think intrest rates would raise a whole % in a year (maybe wrong tho), but lets asume they do, you would have payed off about 20 grand in that time, so you’d only be paying 8% on $80,000
so why would you lock in and start paying 7.5% or what every it is now on ya full $100,000?? well thats my view, the maths is proberly up the shit, but i hope you get my point
NEO
NICE ONE BRUVA!! Nice One Bruv! nice one
steveod
Your spot on with your analysis. If interest rates rise many people are going to be in a lot of trouble. When problems happen thats where the opportunity are for smart investors.
With interest rates currently around 6%, a 1% rise is a 17% increase in mortgage repayments. To some people they won’t be able to afford that kind of increase.
As for interest rates rising 1% in a year, well they fell around 1% in a year so there’s no reason they couldn’t go up as well.
They key is to ensure you are in a position to take adavantage of these opportunities when they arise. I think you’ll find there will be a lag between people selling as interest rates rise and rents increasing as supply decreases.
Insurance seems to be the key. You have building insurance, income protection insurance if your working, you should also ensure against interest rate rises (cash reserves/portion fixed rate), and ensure against vacancies (cash reserves, long leases, happy tenants).
G’day…
I feel hat most of us agree that a rise in interest rates is inevitable. But When????
You might like to have a read of Pascoe on this link…hot off the press today.
http://investor.ninemsn.com.au/investor/News/Pascoe/story_661.asp
Cheers
Bill
Historically has there ever been a period where house prices have dropped ?? I’ve just hit my 30’s and until now wasn’t too interested in real estate – i had a house so i didn’t worry too much.
I can’t help but think interest rates will rise, in fact i’ve got a strong feeling we may see things up by maybe 1.5 to 2% by Dec 2004…
Smart investors got in earlier (ie 12 to 24 mths ago) and shouldn’t have to worry too much, it’s the lemmings that blindly followed and got into the heavy negative gearing properties that i think will struggle when rates rise…
I can’t see prices dropping (i read somewhere up to 30%, no idea where they got that from ??) much at all, rather i think they will level out, particularly in Sydney, which i do believe is waaaay too hot at the moment. Realistically people aren’t going to just give up there homes without struggling, especially for less than what they owe the bank !!
There might be a few bargain IP’s around though if rates hit 12% or so – i just don’t think we’ll ever see those type of rates again…
What does everyone else think ??
Cheers,
Paul…Hi everyone,
This is good discussion. I like everyone’s logic. I agree on running with the market % rate. Any historic charts I have seen always show the market rates outdoing the fixed rates, with one exception. I locked in at 13% when rates went to 18%. Hedging your bet with a split loan gives you a foot in each of the graves too I suppose. One cancels out the other, keeping you on middle ground.
Re market values dropping: Yes they did, from 1994. I have seen families highly geared on loans, rates went up, prices dropped, jobs were outsourced – the big Catch-22. It cost them to sell, yet they could not afford to stay. The PPOR’s were hit hard. Yet this is where the long term landlords with a couple of neg geared props could ride the waves.
My uneducated, yet street learned gut prediction is this:
1/ A .25% increase in rates next quarter
2/ Another .25 – .50 increase by the 3rd quarter
3/ Market values will flatten but not decrease like 1994
4/ New bank products will come onto the scene
5/ The govt. will provide new initiatives
6/ There will be another alternative form of housing .. not sure what it is .. but I can feel some form of community style living to create affordability, industry and employment.
Times have continually changed from focusing on owning your own quarter acre block.
Kind regards, Phil
“Times have continually changed from focusing on owning your own quarter acre block.”
Spot on Phil, i couldn’t agree more… [
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I recently had a look at a new development at Greystanes (close to Parramatta NSW) on the old Boral site. The largest block was 540sq.m and if you bought it you had to build a duplex !!
The largest block for a stand alone home was about 420 sq.m from memory, and some sites were around 280 sq.m !!The old 1000 sq.m (quarter acre) block certainly seems a thing of the past, especially in Sydney.
If only i had bought a few that size 10 years ago !! [xx(]
Cheers,
Paul…Hi folks,
LuckyPhil I think you make a very good point about new bank products, and new banks for that matter. Around 1994 the Big 4 had over 80% of the home lending market and there was minimal competition to say the least, then the likes of Aussie, Adelaide Bank and others hit the ground running in the mid-90’s and woke up the competitive spirit so to speak. The Big 4 now only have about 55% of the market and they’ve tenaciously held on to that much through being fiercely competitive and offering v v cheap products.
While the Reserve Bank may increase rates slightly I think the fact that Brokers have easy access to so many lenders these days (we use close to 40 in our firm) and that as more people get comfortable with turning to brokers to shop around for them and with using smaller lenders and mortgage managers, that there will always be good rates available.
Some of the three year fixed rates are around 6.4% at the moment so if you wanted to fix part or all of your loan it wouldn’t necessarily be all bad either, although many have restrictions like high break fees and inflexible extra repayments which also don’t suit some more active investors like renovators wanting to draw upon newly created equity.
Matching someone’s overall investing strategy with the right style of loan is normally much more important than just the pure interest rate issue.
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Mel
[email protected]Hi Guys
The ASB has raised its fixed rate terms today and there has been a flurry of activity with the Financial Institutions also raising their rates.
Regards
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