How much buffer is needed?

Just wondering what people's advice is. The wife really wants to start paying down debt before interest rates start to increase. She is a bit stressed about the debt.

I have 2 million borrowed and 2.5 million worth of property currently. Thats across 4 properties in brisbane 10ks from cbd. So 80% borrowed.

One property is currently getting an extension so is worth a lot less than it will be in 12 months. So equity should increase about $300 000 once that is complete.

I have $800 per week spare each week after all my bills.

I have $50 000 stashed to finish my current building works.

Does this scenario sound okay or do I really need to get a buffer up?

$800 per week spare sounds like a lot to me but that would be wiped out with just a 2% increase in interest rates. I could survive up to a 2.5% interest rate rise by picking up extra shifts at work.

Anything more than that and without help from family I'd have to sell something.

What do you think? Am I too close to the edge with my current scenario?

Thanks

 

Did you factor that additional 2.5% with the rents at todays prices? What happens if rents drop a little?
I would be stressed if I could only survive 2.5%, but that is my personal conservative profile. I can afford currently 10+%, with the new purchase I'm looking at buying, I can afford 8% and rents declining 10%. And at 8% it still makes me nervous.
And that's all at P&I repayments %

 

Calculated off of current rents.

God Im no where near your buffer.

 

i would think if interest rates go up 2.5% rents are most likely to go up then go down 10kms from cbd. just my 2cents. also you could maybe try airbnb one of your properties if centrally located?

Cheers, Elives

 

Hi Tim
It seems fine to me. I wouldn't worry about interest rates increasing too much because they are not going to go up 2% in one hit. If they start to increase, we will all have some time to make alternative arrangements. If you can start to decrease the outstanding balances, the funds will not be lost forever. We are paying down the principal radically because our finance had to go P&I, which can be a blessing in disguise. If you haven't got anything pressing that you would rather spend the $800 on each month, you could pay some of it off the debts and maybe buy the Mrs something nice to help her feel better about it.

 

I think it is whatever your comfortable with and whether your building or holding or starting to sell down.

Hardly worth having hundreds of k of cash sitting around if your in growth mode, in my mind, unless your buying mainly negative geared property & in near/at peak market.

 

Geez Barny, take a chill pill.

 

I'm conservative and always have been. As angel said you have time when rates move. You could lock some in now at a lower interest only period to help build up the buffer. Also just in case loans turn into P&I for all of us, which most believe it will eventually happen.

 

This scenario does make me feel easy sleeping at night.

 

Principal and interest would increase weekly repayments by $972.

So I could only just afford that provided interest rates don't go up.

Hmmmmm this isnt looking good.

 

This is affected by your age and the strength of your business income or salary income.

A $2m debt for a 68 year old earning $350k selling real estate is different to the same debt for a 41 year old surgeon on the same money.

If you factor in 3 things going wrong all at the same time and your life does not change - that is a good sign.

 

30 yo

Income $3789pw from rents and job. Expenses total $2972 per week.

 

Seems like you have control, an understanding of your finances and a bit of time to ride out blips.

I would not be running out it buy more - just keep doing the Reno and get it under your belt.

So many other factors to think about that can't really be communicated here.

Getting your spouse to articulate what is a safe level of debt and what is unsafe can be a good start to a discussion.

 

What about IO periods expiring? With all the changes will you be able to renew your IO periods, and if not, can you afford the repayments without hardship?

 

I know someone who is twice your age, has double your number of properties, has double your amount of debt and has 13 times your cash buffer.

Everyone is different as their situation is different, their risk profile is different, their portfolios are different, ...

If you understand what you are doing and can sleep at night, then I would guess you are probably OK.

 

3 to 4 years before io period expires.

We would have no spare money if interest only periods end...

 

Listen to the wife ;P

Happy wife happy life....

 

So what would people recommend a buffer to be in my situation?

Should it be calculated off of 10% vaccancy? 7% interest rates? Principal and interest payments?

 

My investment buffers are based on 6 months repayments at a slightly higher interest rate.
If interest rates rise then I'll increase the buffer accordingly. I also have a buffer for property expenses (maintenance, rates, etc).
That's currently at 24 months of its projected because I'm using actively using it for debt recycling.
My living and PPOR buffers are on top of these.

 

Many people want to have a period of time's expenses as a buffer.

So 6 months expenses for instance.

For some people that's 6 months expenses if the properties were vacant, others not, just any shortfall. Some people might calculate the repayments as one of those expenses being at a higher rate, or P&I instead of interest only.

Personally I'm happy with 6 months expenses, based on current repayments, and tenanted properties. I've got landlord insurance in case the tenants do a runner, and a long I/O period to run.

You and your wife need to be comfortable.

I think its a case of discussing with your wife. Is it the amount of debt that's the issue, or is it your ability to make the repayments? Perhaps fixing the interest rate on some of your loans might help? Landlord insurance, personal insurance, loan repayment insurance, borrowing a buffer now while you are able to etc are all strategies/discussions that might help everyone sleep at night.