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Why so many people do not want to pay off their mortgage but only care to borrow more money for IPs

Discussion in 'Property Market Economics' started by paper, 30th Jun, 2015.

  1. paper

    paper Well-Known Member

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    It seems to become the trend to maximal your ability for borrowing the money from the bank instead of paying off your mortgage asap. Due to many have the idea that they will earn a lot from the housing markets especially from the investment properties (IPs).

    Does anyone realize it could end to a very different story? If the economics falls, or housing markets falls or even people lost jobs... all such negative things could impact to make money from IPs.
     
  2. sash

    sash Well-Known Member

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    :DI love living dangerously.

    Question for you....do you have a plan if the economy tanks?

     
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  3. bob shovel

    bob shovel Well-Known Member

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    your not doing your IP research on news.com.au are you? or within the realm of the general uneducated media??
     
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  4. Hanison

    Hanison Well-Known Member

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    The way I see it.

    My PPOR is a liability and any money I put into it is a consumption choice.

    A consumption choice and an opportunity lost.

    For me, upgrading or paying down my PPOR might make me feel good.
    But what are you going to do.
    Sell your house and live in a tent ?

    I yet to find someone that is willing to downgrade their lifestyle unless there are forced to.

    PPOR is a consumption choice on a grand scale.
     
    Last edited: 30th Jun, 2015
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  5. Bayview

    Bayview Well-Known Member

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    It's not a trend - folks have been doing it for a very long time. It is more popular right now due to record low rates, is all.

    To build more wealth, you need to expand your "footprint" as much as you can so that you have more property rising with each wave of CG.

    It is adviseable to do both - pay down the PPOR loan as fast as possible, and expand the IP footprint as much as possible.

    [/QUOTE]Does anyone realize it could end to a very different story? If the economics falls, or housing markets falls or even people lost jobs... all such negative things could impact to make money from IPs[/QUOTE]
    Believe it or not; our economy is failing right now. It is being kept as hidden as possible by the Gubb for now, but there are only a small handful of areas actually doing well. Unemployment is very high, and in my view - will go higher by the end of this year.

    Record low rates and a $20k stimulus for small business will prove not to have jump-started the economy when the end of year figures are scrutinised - I predict. What then?

    House markets do fall, but every area is different, every price range has different demographics which are motivated by different factors - good and bad.

    Generally, IP's which are below median, well located, good condition etc - will always rent, will always keep their value better in a downturn - because the largest pool of people looking for a place to rent or buy are in that price range.

    The CG may be slower with these types of properties compared to more expensive and speculative IP's, but they also carry more risk of corrections.
     
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  6. skater

    skater Capitalist Premium Member

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    It's not an idea, it's a reality. But just like everything in life, you need to educate yourself & protect yourself from the lean times.

    You do realise that If the economy tanks, people still got to live somewhere, don't you? I buy affordable housing. There will always be demand from tenants.

    From where I'm sitting, I can bet that I'll be all right with job losses.......but will you?
     
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  7. Steven Ryan

    Steven Ryan Mortgage Broker Business Plus Member

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    As investors, we should all know things COULD pan out for the worse. That's why we have a good strategy, exit plans, the right financial structures, the right insurances etc.

    But you know what scares me more than the slim chance things go pear-shaped with my investments?

    Not taking action towards achieving financial independence due to fear.
     
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  8. HUGH72

    HUGH72 Well-Known Member

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    Paper just because people are not paying down debt does not mean they are acting without care. Most people will hoard cash in offsets which increases flexibility for further purchases, they leave cash available for other expenses and this provides a buffer.
    There are may reasons for paying IO on loans, think about the situation where a ppor is paid off then the people upgrade to a bigger house. Now they are left with a large non deductible loan and are paying tax on their rental income.
     
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  9. Big Will

    Big Will Well-Known Member

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    This was my exact same thought, yes markets change all the time and a nuculear bomb could be dropped in any city in Australia. Lets say it dropped in Sydney (and everyone lived as they evacuated the city), the housing prices would plummpt in Sydney as it is unlivable but Brisbane, Melbourne, Newcastle, Canberra would all increase in value (there might be a downward trend to begin with). The chances of this happening to Sydney is extremely rare but is possible.

    The person beside me their daughter just bought a house in Bayswater on the weekend for 600k and it is more than they wanted but they had been searching for 2 years and it keeps getting more expensive. Heard this before and we will keep hearing it until something drastic happens.
     
  10. Leo2413

    Leo2413 Well-Known Member Premium Member

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    Hi paper,

    The alternative scares the hell outta me much more than the property market.

    The vaaaaaaast majority of society do not realise when they retire (after they have given the best 50 years of their life to an employer) they will be living on the poverty line till death.

    If that fact doesn't scare you more than possibly losing some money in the property market then that's insanity.

    “The definition of insanity is doing the same thing over and over again, but expecting different results”. Einstein
     
  11. Bayview

    Bayview Well-Known Member

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    Having worked in two different industries where a very large percentage of our customers are/were pensioners - you do not wanna be one.
     
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  12. Leo2413

    Leo2413 Well-Known Member Premium Member

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    Agree BV.

    IMHO the pension is a poisonous and insidious force that fools the masses..

    Its really sad actually.
     
  13. Propertunity

    Propertunity Exclusive Real Estate Buyers Agent Business Member

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    Yes, all true. What should we do then?.......hide ourselves and wait for the mountains to fall on us?
    Or perhaps take some calculated risks and do something to get ahead?
     
  14. Corey Batt

    Corey Batt Finance Strategist Business Plus Member

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    If you genuinely believe there's a likelihood of catastrophic failure you wouldn't invest in the asset class.

    Take calculated risks, mitigate your losses and hedge where possible - there's no such thing as a risk free return.
     
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  15. Befuddled

    Befuddled Well-Known Member

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    Part of investing is risk mitigation. Most people here would have some sort of fallback if that happens.

    The amount of money you borrow from the banks is only a part of the picture. What's important is the value of the assets you have against that debt, or the LVR.

    Who cares if you've borrowed 3m from the banks if you have a $10m portfolio? If you run into trouble you can just sell a couple.

    Compare that to the status quo who borrow to their full capacity on their homes. Like that couple who take out a 800k loan on their dream home in Sydney, and subsequently slave away for 25yrs to pay it back. If one of them gets sick or loses his or her job, how do you think they will fair?

    Just because 99% of the population do the latter does not make it the right, or safe way, to go about it
     
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  16. Big Will

    Big Will Well-Known Member

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    You cannot eliminate 100% of the risk but if you are looking at investing in a serious way and you are using your income to support the portfolio you really should be looking at personal insurance (life, tpd, income, perm dis) as unlikely it is that I will die today (or tomorrow) if it did happen I know my wife will be financially okay to keep the portfolio and not have to change her lifestyle (besides grieve for me).
     
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  17. Jingo

    Jingo Well-Known Member

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    My dad asked me this last night! My explanation is that the properties will do the heavy lifting and pay themselves off over time, through rental increases and capital growth. Release titles, sell the ones that have grown and keep the rest.....
     
  18. DanW

    DanW Well-Known Member

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    It's all about control.

    Do you want the bank to control your money or you?

    If the bank has 100% of your mortgage over your land, do you think it makes a difference if you owe 60% instead of 80%?
    It won't make a difference at all - they can still take it whenever they want and sell it below market value.

    If you want to be in control, take all of your savings generated by investment cashflows and accumulate them in a second offset account. Preferably with more than one bank. You still pay the same amount of interest, your registered mortgage is no different, but you have full control of your cash.

    The other reason it's best to have control, is that you can move money in and out of your offset accounts without having any tax consequences. However you can't do the same with loan repayments and redraws as redraws are treated as new borrowings for new purpose... it's a technicality but that's life - don't wish it were easier, just work with the rules that exist.

    Your last question about risk and the economy falling - if that happened wouldn't you much rather have CASH reserves in offset, than having to ask the bank can you please borrow back that money that you paid off earlier?
    You can't just get equity out any time you want.. the current changes APRA are making are the perfect example - I'm looking at a couple of years where I cannot borrow a single thing, and I'm damn glad I use offset accounts right at this moment. If I lost my job tomorrow I'd be OK.
     
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  19. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    Just going to comment on this...

    The ones to sell are the ones that are not likely to grow in the future and/or are costing you too much to keep. A mistake is to sell something just because it has grown because it still might keep growing.

    Ie. Its best to keep your very well located properties, keep whatever will always be in demand. That includes properties in walking distance to train stations, properties in desired areas near amenities (shops, hospitals, universities, good school areas), properties where its easy to get good tenants paying a reasonable rental return. Locations with a strong and growing ethnic or cultural community that is getting weathier. Never sell them. These properties will always be in demand, and so should be long term holds.

    If you must offload, offload what doesnt fall into this criteria first. Lifestyle/Premium suburbs where the ordinary person cant afford, steer clear. They can suffer deeply in a downturn when the really high paying jobs disappear and the sharemarket takes a beating. Locations where its hard to get good tenants, definitely consider offloading those.
     
    Last edited: 1st Jul, 2015
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  20. skater

    skater Capitalist Premium Member

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    I'm going to disagree! :D
    We've all got different goals, and the properties we hold are diverse. There could be many valid reasons for selling.

    Never sell, is a very strong term. Again there could be multiple reasons for the sale, buy I'll give you one example; There are many investors that buy excess in an area, only to divest of several after they've achieved the growth they were seeking. Funds then can make their way to the next growth area, or even to pay down mortgages on the 'keepers'.

    Just me.....but I'd never buy into lifestyle type suburbs in the first place.........but they can also be good investments if you get the timing right.