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What interest rate do you plan for?

Discussion in 'Property Finance' started by bamp, 4th Aug, 2016.

  1. bamp

    bamp Member

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    Just curious as to what interest rate the knowledgeable investors of Somersoft use as a worst case scenario when doing their own budgets/models?

    I've been using 8% but given the current market, I can't see this rate being achieved within the next 5 years...
     
  2. Vassago

    Vassago Active Member

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    I have used 6% for planning as the future average in the long term.
     
  3. BarneyRubble

    BarneyRubble Well-Known Member

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    Look at that, I am right in the middle. I use 7% for my modelling.

    Agree that it will not be back up there anytime soon. Indeed, the next rate movement here in AUS is likely to be another cut.
     
  4. John Bone

    John Bone Well-Known Member

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    I use the current rate for developments that will take less than 2 years. Any changes to the rates in that time are inconsequential to the outcome.
    Long term holds (10 or more years) I use 7.6% because that is the long term average interest rate in Australia. It may be a bit lower now though. Interest rates are only part of the equation for long term investments and I also factor CPI at 3.5% thus assuming the value of the income will devalue by that amount each year. Growth at 6% is also a factor and offsets the CPI but you can't spend growth at the supermarket.
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I use 7% but don't expect it to go back up for many years
     
  6. Biz

    Biz Well-Known Member

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    I plan for sub 3% rates. If they get to that level I am selling everything.
     
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  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Why is that biz?
     
  8. Scott No Mates

    Scott No Mates Well-Known Member

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    I'm with @Biz - 3% (above current rates).
     
  9. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    I've always used 7% - which is working out nicely at the moment :)

    Cheers

    Jamie
     
  10. Colin Rice

    Colin Rice Mortgage Broker Australia Wide Business Member

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    Banks use between 7-8% currently in their servicing calcs so thats a good guide.

    Will be interesting to see if any banks adjust their calcs inline with the recent drops as well as future ones, as it will improve serviceability.
     
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  11. Rchua

    Rchua Member

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    The banks or APRA need to review this. 7% - 8% in a low inflation environment that could last for quite a number of years. A bit high I think...
     
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  12. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    I agree, but the banks argument is that it's quite feasible for rates to go back to 7% at some future date.

    What they don't take into account is what would need to occur in the wider economy for rates to get to 7%. Wages and rents would definitely increase before higher rates hit the shelves. Then again the cost of living in general would also increase.

    Given both wage increase and cost of living increase, the 7%+ assumption is quite reasonable, especially for owner occupiers. For investors however the situation is more complicated.

    I actually think the CBAs system is probably reasonably balanced.
    * New debt is assessed at 7.25%. Essentially this is for one property.
    * All other (mortgage debt) is on the remaining amortization period schedule with a buffer of 20%.

    In this second point they assume that sooner or later your IO loans will revert to P&I (which they will). They take what the future repayments will be and add a 20% buffer which is prudent.

    Overall this gives consideration to both increasing rates, increasing wages and increasing cost of living. It's not particularly easy to calculate however.

    All that said, the banks factor is multiple levels of conservatism. The way some lenders are calculating the cost of living is quite illogical in many instances. For investors, I the bank believes you can afford it, then you probably can.
     
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