Preparing for the worst

Investors has plenty of time in the last 12 months, things are getting tougher
time to prepare for the worst of thing to come and you come out stronger and richer


He's not really known for making bold calls but former Reserve Bank board member John Edwards certainly made one on Wednesday when he said the central bank would have to hike the official cash rate at least eight times if its forecast about the economy comes true.

You could almost hear the gasps of disbelief from debt-laden households and property investors.

And for good reason.

In theory, a move in the official cash rate by 2 percentage points to 3.5 per cent would take the average mortgage rate to well over 7 per cent.

Why investors should heed John Edwards' big call

 

I could fix my interest rates today for 5 years at 4.49%.

5 years is a long time (to me) to prepare for what happens after that.

With articles like the above, I am starting to wonder if I should?

 

"...if its forecast about the economy comes true."

How accurate have their economic forecasts been the past couple of years?

 

I'm going to stick my neck out and say absolutely zero chance RBA will increase interest rates by 2% over 2 years.

The economy's not doing well with nothing on the horizon to indicate much changing in the forseeable future.

RBA also knows how much mortgage debt the country has - the pressure/backlash will ensure they take a softly softly approach.

 

here's a hedge: http://www.sportsbet.com.au/betting/financial/interest-rate-decision

 

Depend on your risk tolerance and ability to service
Interest hit 10% I still don't have any issue so I always stay variable

 

Sometimes RBA hand are force cant do much as rate movement is not purely on RBA rate
offshore funding cost,what the american and euro doing with their rate that may push up long term
mortgage back security bonds.

Read the whole article it provides a very balanced view it not an alarmist article, totally rule out rate rise is not a wise move

 

agree, and i thought it was a reasonable article - thread title though, almost put me off clicking the link!

 

with the latest "Labor-lite" budget set out by Mal Turnbull a few weeks ago, and to be followed on with more disasters under Bill Shorten and his Union comrades the next year after that; I think we can all be pretty safe in the knowledge that the economy is now going to be soon approaching the 'S-bend", and will disappear completely after Bill moves into The Lodge.

 

My ability to service is fine. I would just be annoyed to pay 7% interest when I could have been paying 4.49%.

 

Earn, save and then spend in few years' time.

 

You can consider fixing a portion of your loan or fixing part of it for 3 years instead of 5, etc.

 

^^ This. Work out the max you can save towards your offset stash over say 3 years. It will probably be less than the debt, so there is little point leaving the whole lot on a variable rate tring to fill the offset with funds equalling the debt during that time.

 

I was actually thinking of getting an io loan for an ip Airbnb purchase - but will wait and see what happens post 1st July

Was sort of prepared fixed rate 2 loans 3.59% to 3.79% earlier in the year till 2020. By then permits shd be out and will look to sell.

I think the theory of 88% lmi on IO loans to save up cash to build multiple ips is a strategy of the past. Will say high yielding assets or chop/change/flip/dev approaches would be the way to build sizeable cash buffers to take on more ips.

 

Good point. I keep forgetting about offsetting. Within 3 years I could have one of my loans completely offset, so I guess there is no point fixing that one.

 

Your right, will take the RBA till 2021 to increase another 2% and it will start from mid 2018 and SLOWLY up.

 

For every 1% increase I lose about 30k pa cashflow. If I cop 3, I'll be neutral. Any further and it's out of my pocket. Any ideas on hedging this? Recently I've put a sh*tload towards shares because the thinking is - if rates are to rise it's in response to a strong economy. Current plan is all future income goes towards shares for the next few years. Nightmare situation would be some sort of stagflation situation where rates rise while economy is still bad. Honestly I don't currently have a plan for that - and I'm not brave enough to sell down right now lol... but it's an unlikely situation, I tell myself.

 

There is an option to fix all or some of your loans to lock in todays low rates for 3 - 5 years. There are implications of doing this so I would recommend you seek advice if you are considering this.

 

I think you reasonably safe with 3% increase buffer, why not save the surplus cash flow from now till then if and when it gets there, if it gets there at all ?

 

I'll definitely be investigating locking some rates in just for risk management for coming years. I'm fine with the implications - what are they mainly? No offsetting and break costs... anything else?