Can you service your existing debts if rates rise to 10% or 18%

Just a general discussion here.... Are there any old esteemed members of this forum who had debts in the late 80's / early 90's when rates were 18%. I was a youngster then but remember my parents having their business loan, home loan and overdrafts on the clinics. They had to pay the private school fees etc. They survived the high rates thanks to the profitable business.

If in the next 5 to 10 yrs rates increased to 10% or god forbid 18%.... could you service your debts? (Anz 10 yr fixed rate is around 7.69%).

Obviously a lot of investors would be bailing out and we would see a significant correction in property prices.

A lot of investors will say 'it will never happen'. Anyone who has studied Economic theory in detail could disagree.

Would you sink or swim if the rates rise above 10%
 
A lot of investors will say 'it will never happen'. Anyone who has studied Economic theory in detail could disagree.

Economists that have studied theory will all agree that rates are highly unlikely to ever go back up to 18%.

This was pre-inflation targeting days. Now that we have a credible inflation target, our expectations of inflation are well anchored.

This drastically reduced the interest rate expectations too.

I suspect if rates went to 18% everyone would be very stuffed! Thats an enormous buffer to be kept to keep head above water.

Cheers,
Redom
 
Australian housing industry would be seriously impacted and lot of investors will be ruined, I don't think in this day and age the interest rates will go back up to 10% even, let alone 18%.

The other side of this if it happens would be that lot of foreign money would start flowing in and lots of that wouldn't be good for Australian economy either, my 2c..
 
Just a general discussion here.... Are there any old esteemed members of this forum who had debts in the late 80's / early 90's when rates were 18%.

I don't know about esteemed, old - yes. Yes, I had a home loan then. Bear in mind that those high rates only lasted for 2 years and a valid strategy at the time would have been to fix interest rates for 2-3 years at a level you could comfortably service - before they went to 18% obviously.
 
During the GFC delivery rates to borrowers reached about 9%-10%. During this time it became very difficult for almost anyone to qualify for a mortgage. Lending was at it's lowest that I've personally experienced.

Businesses were also having trouble making ends meet. High rates were hurting everyone, it make it expensive to do business and as a result people were being retrenched, companies were closing, housing mortgage defaults were increasing. Fortunately the RBA recognised this and rates dropped like a rock to 5% within a very short period of time.

So...

Could rates go to double digits again? Sure it's possible, but a lot would need to change in the meantime. Many of those changes would also lead to an increase in debt levels which would balance out the ability of people to borrow more, so realistically it's highly unlikely that we'll see those sorts of rates any time soon. Debt to income ratios are now significantly less favourable than they were during the GFC. It was unaffordable then, it would be worse now.

Right now I have trouble seeing how the majority of people could afford rates of 8%, let alone double digit rates.
 
I have my budget where I can play with the interest rate. It shows that we will be in trouble if the rates go beyond 10%.

Having said that, won't the rents go higher as we will have more renters?
 
If in the next 5 to 10 yrs rates increased to 10% or god forbid 18%.... could you service your debts? (Anz 10 yr fixed rate is around 7.69%).
On current rents: 10% yes, 18% yes.

How much this would hurt depends on how much rents increase over the next 5 to 10 years. 18% at current rents would be painful.
 
I have my budget where I can play with the interest rate. It shows that we will be in trouble if the rates go beyond 10%.

Having said that, won't the rents go higher as we will have more renters?

Not necessarily. In times of hardship many people cope by moving in with family or friends, sharing or finding cheaper accommodation.

In the 1980s we paid 16% on an IP loan. Finance was much harder to get.
Marg
 
If rates were to rise by a full 2%, those without the correct structures in place I believe would feel the squeeze.

I had thought that lenders when going through a loan approval process, calculate serviceability at rates 2% above current at the time. So in theory borrowers should be fine.
 
I remember getting a cool 17.5 % on term deposits that was nice.

My first property rate was 9.4% not too bad when prices low as they were then (eastern suburbs Sydney about 3x wage). That rate now would burn many and force prices back down but things would reach an equilibrium again.
 
Ive just refinanced my IP and serviceability was proven based on the current int rates. I topped up my loan and have borrowed maximum that I could. I fixed my rate 5 yrs for many reasons and now will know what my cash flow will be. Its cheap finance at this fixed rate as rates are low.

The importance of knowing ones cash flow cant be overstated. If at the end of my fixed rate term the rates have doubled then I also presume rents would have increased in line with CPI core inflation. My I.P is in an area where there is chronic shortage of rentals and thus the rents will always be high. I also have access to substantial cash reserves if I need it and have shares. The point of all this is that if your highly leveraged you should think about contingencies.

I have a friend who has over 5 properties in sydney. He has moderate debt levels and he told me that if rates go up above 10% he would ride out the storm by using his earnings as an I.T contractor to fund his debt levels. He lives alone in one of his properties and would get flatmates in to get extra money etc. He is currently paying large land tax bills and paying them with his I.T contractor money.

IF you happen to be cashed up at at time when rates are in the 10% zone then this is when you can pick something up a bargain. There will always be people bailing out due to serviceability issues. We all know that one usually makes money in property when you buy (i.e. if you get it cheap).

High interest rates in Australia is surely the ONLY thing that will burst the current property bubble....
 
I had thought that lenders when going through a loan approval process, calculate serviceability at rates 2% above current at the time. So in theory borrowers should be fine.

Yes but many people borrow what they are told they can afford, without realising they can't afford it as proper capacity hasn't been established - just a lender using a poverty line monthly expense amount.
 
At 18% I would be stuffed!

If rates jumped to 9% over night, I'd ok for two years. At which point my wife and I would need to go and get real jobs again.

I see 9% as a real possibility at some point down the track, so I'm working to eliminate that threat over time, increase cash flow, reduce debt.
 
It will be long time to before it comes. All but one of my properties are positive cashflow now. So if the rate rise comes gradually, I should be able to to increase rent to keep up with it.
 
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