Interest Rates - What is your breaking point?

I've read in a few places (including on here) that when considering taking on more debt you should ensure that you can still service all debt at an interest of 8% (some say 10%, but 8% seems to be more common).

I've just knocked up a little spreadsheet to calculate my 2 existing loans plus a proposed third, with a running tally of what the repayments would be based on a climbing interest rate. Assuming no changes in wages or increases in rents, I would probably top out at a little over 6%. That's got me a little nervous about buying another property, but even without the additional property I still wouldn't be able to hold much past 7%. This will all change in about 4 years time when my wife goes back to work (we're acquiring liabilities, aka kids at the moment).

Is this risky? Am I in the minority here?

Considering no increase in rent (i.e. today) and I/O payments across all loans, what's your 'breaking point' in terms of interest rate (I'm sure there's a better term for this).

 

don't forget about fixing rates - this may help your situation

 

Rates could be over 10% and we should be fine. Could not sleep at night if my level 5-6%.

 

Yep, agreed. I've currently got half my debt fixed, but my (limited) experience has been that fixing for anything more than 2 years incurs a pretty hefty rate, so at best case I'm insulated for 2 years.

 

I'll be negatively geared if rates hit about 7%. I could survive ok till about 8%. That is talking week to week cash not eating equity. The reality is though that if rates rise rents will rise too. It isn't 1 for 1 but you can expect frequent rent rises when that happens so I could probably survive at even a higher rate if it did eventuate.

My portfolio is sitting at around 60% LVR depending which way the wind blows though so it's not something I worry about. A few weapons I can deploy if needed. People on here stretching their necks at 90% with a slither of positive cash at the moment though I would be worried.

 

With my current portfolio rates of 12% would be the point where my repayments exceed the total of my income after living expenses. Although I do have cash savings etc which means I'd last longer. I don't anticipate they will hit that level in the medium term, given people have now borrowed significantly more in dollar value terms, smaller rate increases will now have a much larger effect.

 

That's true. Negative gearing helps ease the pressure, and it's unlikely that rates would rise without the rent rising. I'm taking a very simplistic view, which is some advice I've read both here and elsewhere.

Is there a 'magic' number that you assess your ability to service against when considering taking on more debt? Do you take into account rent rises, negative gearing implications, changes in wage due to inflation, promotion etc.?

 

Around 10% would be where we would get uncomfortable, i.e. would prevent overseas travel and other luxuries and be looking at exit strategies if rates weren't fixed.

 

Not necessarily - a dangerous assumption. Only some rental properties are negatively geared to the extent that a substantial rise in interest rates will threaten their viability.

Rent rises are dependent on rising demand. If interest rate rises coincide with greater unemployment, rents can go down if demand lessens.

Simply look at recent history in some mining towns - rents (and property values) dropped dramatically solely due to changing demand.

Likewise, low interest rates CAN coincide with increasing rents.
Marg

 

In my experience that isn't the case. Can't say for one horse mining towns because I don't buy there but as rates go up investors start to lose interest in properties and offload, less supply, higher holding costs higher rents. The rents don't quite keep up with the rate rises but they do track in the same direction. Same thing is happening now in most markets in the opposite direction, rates are (or have fallen) and vacancy rates are starting to rise due to competition amongst landlords.

 

15% would put us on the edge.

 

I could go up to about 10% but I'd be looking to fix the interest rate before it got up to that level. If I was stuck with a 10%+ interest rate I'd probably look to offload some properties/rethink my strategy.

 

We had rates over 8% only 7 years ago so I would be concerned if I couldn't handle this comfortably

 

Around 10% and we will have a blood bath in our own micro economy

 

12%.

 

I'd say currently, right now with my situation, 9-10%. But of course, would fix if I had the opinion it was going to increase consistently to that level!

 

Having seen 9 a couple years back, i have budgeted for 9 again. Shall see how we go

 

We seem to generally be an over cautious lot.

 

Really? The poll is hardly conclusive, but 30% of respondents couldn't service debt at 7%.

 

I pay every month as if it is 9% (any excess goes into the offset), I could push to 12% before things would get tight.