If rates rise by 0.5%....

Apparently if rates rise by only 0.5% then one in three people are in trouble...

How Sensitive Are Property Investors To Interest Rate Rises?

Thoughts?

 

More properties to inspect

 

The article says a quarter, so one in four. If you are in that minority I think you need to take a good hard look at your situation and focus on risk mitigation and building buffers.

Greed will always be there so some will always be toeing the line, I wonder if one in four is actually a historically significant portion of investors.

 

It's a bit of a stretch if you think about it...

The vast majority of mortgages were put in place when rates where significantly higher than they are today. Interest rates have only been at current levels for a bit over 12 months. If people will be in trouble with a 0.5% rise, it's implying that there were a lot of people in trouble only a few years ago. I don't recall that really being the case. Thus it's fair to assume that it's only people who got their currently loan within say the last 18 months who might be in stress in the manner described.

Then there's how the banks go about assessing loans. Todays payments are assessed at above 7% on a principal and interest basis with almost every lender. This means the banks are assuming almost double the actual repayments when they qualify people for a mortgage. Whilst this criteria has tightened in the last 6 months, most lenders have been applying this type of test for years.

Finally also consider what occurs in the wider economy if rates begin an upward cycle. The RBA increasing rates will likely be to put some controls on inflation. That suggests that businesses are doing well, employees are getting salary increases, money is flowing overall. The RBA is reactionary in nature, so rate rises will generally come after there's more money in peoples pockets, not before.

If rates increase by 0.5% there will be some people in stress, but most of those people are probably already very close to it without an increase. Their problems are due to interest rates, there's other things at work such as loss of income or over exposure to consumer debt.

People will have to tighten their budgets with any rate increase, but my experience is that most people can do this when necessary. 1 in 3 is a very bold statement and very much over exagerated.

 

It's one in four are in "discomfort" with the current interest rate.

It goes up to nearly a third once rates increase to 0.5%...

On the other end of the spectrum about a third of investors have enough of a buffer should rates increase a lot.

You make a good point though...I wonder if this is just normal?

 

With private debt and median income to median house prices at historic highs I wouldn't be surprised if a lot of people would be in trouble if rates were to rise. Add in the fact that most jobs these days are a lot more insecure it's really no surprise that there are a lot of nervous people out there, particularly among owner occupiers.

 

If anyone is in 'discomfort' from current rates, they should sell or do something about it asap. This basically means they've lost their job or something and can no longer service, or they have always been in discomfort since their loan began.

It's not going to get any easier than this.

 

I think it depends a lot on how you define, "discomfort". Personally I'd be a lot more comfortable if I didn't have a mortgage over my own home and I will be less comfortable if rates do increase. That said, there's still some room in my budget to allow for rate increases (and despite being self employed, I pay myself a regular salary and budget around that).

I have been under mortgage stress, it's not good at all. It wasn't due to rate increases however, it was due to a lack of income. Every case where I've met borrowers in mortgage stress, it wasn't the mortgage or the interest rates that put them there. First they load the gun by taking too many credit cards, personal loans, leases or other consumer debt. Then something like a baby, loss of job, health or similar pulls the trigger and they get in trouble.

It's not mortgages that get people into trouble, it's other less regulated debt and their own bad decisions that do it.

 

If rates rise by 0.5%....?

- Use buffers
- Increase rents where possible and reasonable
- Have a portfolio with partially locked in IR to mitigate some risk and keep cash flow stabilised.
- Be on the lookout for distressed sales and some great deals.

IR rising and falling should always be factored into any equation when investing and determining short, medium and long term risk.

Same as rental vacancies, maintenance costs, malicious damage, income loss etc.

Isn't all this just part of investing responsibly and intelligently..

 

Just over 4 years ago my average interest rate across all my loans was 9.5%. I'm not sure I would even notice if all my loans went up by 0.5%.

 

0.5% no problems for me at the moment. More worried about 3 HWS systems requiring a replacement at the same time with the council rates all due!

 

They probably should, but as mortgage brokers, you would have all seen how many people have upgraded or topped up loans to do other things or invest.

If rates rise slowly, and the economy is improving in many areas, it would probably be no big drama.

If the Labour guys get their plan in place and property prices take a good hair cut, if at the same time lending costs go up and that is passed on multiple times, all while some other part of the economy heats up causing RBA to rise, then anything is possible.

Nobody can say what may line up to make things difficult, and many people, including many of us here could get into trouble.

 

@dabbler - that's true, but we're not in trouble right now.

BUT - and this is what we've all been saying for ages - you need to get things ready now for what may unfold in the future. If you're x-coll, fix it. If you have accessible equity, get it out. If rates going up is going to cause stress, fix them.

Give yourself as many options for security and risk mitigation as possible.

 

Yeah, for sure, but it is a gamble, this outlook means do not buy - sit on the sidelines, then when it has not all fallen apart in a few years, then it means you have lost out, it is a hard balancing act. Now I think this has always existed, but with the internet and social media and low standards by journos it seems amplified.

The APRA changes also put a stop to getting lot of equity out for many who had been buying.

The scary thing is, some of the clowns in power would like to remove the ability to claim interest as a loss, you can see it in many of them, some seem to lean more toward communism than socialism.

For years I have seen both parties mimic each other pretty much, the new plan by labour I think would be devastating and would punish many of us.

Also, the real problem, as I see it, is if we can keep the system going as it has, or if it will fall apart, if the later happens when you have higher LVRs or maybe even lower ones, could spell real disaster, at least we all wont be alone, home owners will also be in the same boat, only those with no debt will not have an immediate problem.

 

Ensure you get proper life insurance, TPD insurance and income protection. I have seen too many who can't work due to illnesses and struggle to meet mortgage payments and living expenses.

 

Hi Larrylarry, those are different issues, and if prices hold or grow then you have the option of selling, if your place is worth less than any remaining loan, your shot.

 

I understand your point but what I'm saying is that insurance should be part of one's wealth creation strategy because most owners or investors are employees. If they are sick they lose the income. Of course, if property is fully paid off, the stress is less than someone who is highly leveraged. The book The Richest Man in Babylon reminds me the importance of insurance.

Also, property is not as liquid as shares so it's going to take some time to sell and realise gains.

Back to interest rate rise, I think 0.5% is not going to do much damage.

 

And it's really important to understand that if values do go down and you're x-coll, you're completely stuffed. You may not even be able to sell.

Really good point re- insurances @larrylarry.

 

I don't agree. I think if we keep the system going as it has, it will fall apart. Not a matter of if but when. The system is broken and will experience issues. I won't say collapse because that is wrong, severe correction is more accurate. I also don't agree those with lower LVRs will have an immediate problem. Some investors, like me, have deleveraged because we recognise a correction in prices is imminent or underway. We also know that interest rates will increase. To give you some idea, not exaggerating at all, if interest rates rose to 10% tomorrow, I would start experiencing problems in about 10 years (assuming rents don't increase). If I lost my tenant and could not replace them and also lost my job, at a 10% interest rate, I would be in trouble in about 7 years.

I understand all the doom and gloom around property right now and I encourage it. However, to say that "only those with no debt will not have an immediate problem" is a bit over the top. Some people are in trouble now, with a 1% interest rate rise, more would be in trouble. But in the scheme of things, these people will be a minority. We have know about this downturn for long enough for people to deleverage. Some have, some haven't. Choices and consequences. But even for those who haven't, I know they have risk mitigation strategies in place.

 

Yeah, being crossed or using same lender too much not a good idea, I agree.

I had a vendor who was selling, getting into the why's, they had sold another IP to fund something to do with building elsewhere, to his horror, the bank did not release any funds to him, so he was selling a second IP, I am not sure if he could/not re finance, but that is in good times, they wont be nicer if it get's messy.

re the .5%

Well many of us have already had at least one rise, and we are expecting more, so that will be approx .5%..... the forum is still busy, people are still buying.