Did I get it wrong or is the guru of 'cashflow mortgages' doing a backflip?

[Wishlist]

Seems to me that as little as 18 months(?) ago Investors Direct was eagerly pushing 'Cashflow Mortgages' on the basis of solid capital growth of av. 10%.

However, in the latest newsletter the following...

'.... Australia is lagging behind the US but have a few positive things to keep us going, but we shouldn’t take those things for granted and need to act fast, especially for highly geared property investors, it is time they look into deleveraging their portfolio to avoid unnecessary risk.'

Of course the economic has changed, but for those 'highly geared property investors' who have been kindly helped into this position by Investors Direct, I am wondering if you feel a little ripped off?

Wishlist

 

[BoatBoy]

especially for highly geared property investors, it is time they look into deleveraging their portfolio to avoid unnecessary risk.'

I don't know what a cashflow mortgage is, obviously not used to buy cashflow+ purchases or else the above quote wouldn't be there.

The above quote should be no surprise to anyone now though surely?


Dave

 

[Peter_Tersteeg]

Personally I felt these types of mortgages where quite high risk. They releyed heavily on continual capital growth and despite making negative geared properties look cash flow positive, they were easily proven to be significantly more expensive than a regular investment loan. On the whole I agree that the property market does increase overall, but it doesn't happen at a constant rate and it does drop from time to time.

Almost a year ago, Seiza, the main funder of these loans, went into receivership. The result has been that the rates have increased significantly above the rest of the market, people have given up equity on properties that have not moved in value as anticipated and they've got high exit costs as well. The result has been a low equity position with high costs to maintain and high fees to go elsewhere. Not a good position especially when some lenders are getting picky about who they'll refinance from.

Frankly I think investors direct made a massive error pushing a 'fair weather' product so heavily. Especially when even back then it was obvious that there was some sort of credit crisis and market correction looming. I'm just grateful that the major banks didn't jump onto this bandwagon or we'd all be in serious ****.

 

[boomtown]

Did a cashflow mortgage rely on capitalising (at least some) of the interest?

 

[grossreal]

hi all
not one to go either way on this one.
but for me its great to sit back and look in the rear view mirror and say that we would have done something differently
I am not for one minute putting up one product against another but its great to look at a product in hind sight and if anyone was thinking that the market was going to go they way it has ( and by the way have a look a couple of my posts of say 12 months ago) then no one would have taken this product
but the product was taken in a very differnet market.
and for me I don't look back at products that we there or people took.
I look at current and see if the client can get a product today thats better then they currently have
I love people that say if we had of done this 2 months or more ago.
well I would love to be 18 again and both are not going to happen
so instead of looking in hing sight look forward not back
because back is good doing due diligence and under stand whats gone before but you have to fund or get funding in todays market not yesterday.
and by the way I have no loan no interest or even spoken to investors direct
nor for that matter would I but I just don't like people making a choice to borrow and lend and its always the product thats the problem not that it was done in a market that the product was at the time the best
and if it was not the best
then why did you buy it
I don't buy inferior products or dodgy if possible.
so i don't see a back flip
I see a change in markets
and I can tell you if you go into any cbd city and walk up to anyone and ask is the current market different from 9 months ago and the person that no its the same
grab him or her because they are a local cave person and been in an ice age pack and looking for sabertooth tiger.
so back flip no understanding a market maybe.
oh and add a few,,,, ....


as needed

 

[Peter_Tersteeg]

Did a cashflow mortgage rely on capitalising (at least some) of the interest?

Yes. It started about 1% below the better rates available at the time but capitalized fairly heavily. Over 5 years the rate usually went up and the capitalization decreased.

Over 5 years it capitalized about 10% and on balance the rate was a little higher than the standard variable rate. The idea was to refinance/recycle at the end of year 3 and start the cycle again. Most of the lenders offering it shut it down about when many people were in year 2. It shut down their exit or recycling strategy.

It was great for cash flow (when rates were still low) but at a heavy cost.

 

[Wishlist]

.....

The above quote should be no surprise to anyone now though surely?


Dave

Quite so. No surprise.

Just seems that it is a shame that people enter into financial arrangements relying on the 'expertise' of the professionals that they have gone to for advice. As I recall, in this case there was a lot of hype and self promotion by Investors Direct of the 'Cashflow Mortgage', but little if anything about the potential risks associated with this kind of lend. I didn't take such a loan, nor anyone I know, but feel for those who might have been tied up with such a loan, based on 'professional' advice.

Perhaps I would just like to see the 'professionals' more accountable, or perhaps an admission of
'Woops! That wasn't such good advice. Sorry!'.

Wishlist

 

[Peter_Tersteeg]

When setting up a loan a broker should be giving consideration to the risk level of the lender and product recommendations over a reasonable time frame. I believe most true professionals want what's best for their clients but everyone does make mistakes.

The problems with cash flow mortgages was that they did rely on a healthy market from both a property and finance perspective. I think most people were aware 18 months ago that there was a credit crisis coming, but most people didn't really understand just how bad it would get. Most people would never have thought that Macquarie would stop lending money for property but they did about a year ago.

 

[josko]

An interesting topic.

To be honest, it was not only Investors Direct.

I appreciate your input, grossreal and Wishlist I agree with you.

I'll admit, I have been one of those people that took the advice of professionals (while not Investors Direct) - my accountant included, and found myself in debt up to my ears with no Capital growth to offset it.

However, as grossreal says, what a lovely thing hindsight is and I bet the guys in Wall Street took advice from professionals as well. We all seek advice from someone but not one person can predict the future- nor the economic melt down we all find ourselves in.

All we can do is learn and learn and then learn some more. We are all lucky to live through this time and will be better off for it in the long run.

Regards JO

 

[josko]

When setting up a loan a broker should be giving consideration to the risk level of the lender and product recommendations over a reasonable time frame. I believe most true professionals want what's best for their clients but everyone does make mistakes.

The problems with cash flow mortgages was that they did rely on a healthy market from both a property and finance perspective. I think most people were aware 18 months ago that there was a credit crisis coming, but most people didn't really understand just how bad it would get. Most people would never have thought that Macquarie would stop lending money for property but they did about a year ago.

Exactly! We expected the bottom end of the cycle and most of us have not been through a recession. First time for everything!

Regards Jo

 

[evand]

Yes, hindsight is a lovely thing. That's why its important to implement risk management in our investment decisions.

People who get into trouble investing is because they don't manage risk properly and can see their problems only with hindsight.

If you don't know whats coming up ahead, why would you go out on a limb.

As an old car racing line goes "to win the race you first have to finish the race." Which is like managing risk and is a good analogy.

However, as grossreal says, what a lovely thing hindsight is and I bet the guys in Wall Street took advice from professionals as well. We all seek advice from someone but not one person can predict the future- nor the economic melt down we all find ourselves in.

 

[josko]

Yes, hindsight is a lovely thing. That's why its important to implement risk management in our investment decisions.

People who get into trouble investing is because they don't manage risk properly and can see their problems only with hindsight.

If you don't know whats coming up ahead, why would you go out on a limb.

As an old car racing line goes "to win the race you first have to finish the race." Which is like managing risk and is a good analogy.

A certain amount of risk must be taken to get anywhere. Investing IS risk. I know you are pinpointing the amount of risk one takes and I wouldn't call myself aggressive, yet a Financial Planner would.

I always had an "EXIT" strategy and a Plan A and B, however I'll admit my lack of experience in a recession and cycle has seen me lose ground.

Warren Buffett, Donald Trump would not be where they are without a high level of risk.

Let me throw this one out there:

"If we listened to our intellect, we'd never have a love affair. We'd never have a friendship. We'd never go into business, because we'd be too cynical. Well, that's nonsense. You've got to jump off cliffs all the time and build your wings on the way down." Annie Dillard

Regards JO

 

[evand]

i wasn't referring to you directly Jo. Yes, of course risk is an integral part of any achievement but managing that risk in accordance with future unknown conditions is more important.

EG: In 2001 i knew i could buy property with 9% yields (low risk) in outer Brisbane. I also knew we were at the beginning of an upward trend (low risk) in property prices. (i didn't know then it would be a boom of such magnitude)

The above meant i could take quite a risk. I went to Brisbane and bought 5 houses in one weekend.

If i tried to do that now (or at anytime in the last few years with low yields and price direction uncertain but most likely down) i would be ignoring my risk management and asking for trouble. So i stay conservative until the time is appropriate to extend risk again.

And i agree with your quote in a personal context, not so much when it includes dollars. Or my family's financial stability.

A certain amount of risk must be taken to get anywhere. Investing IS risk. I know you are pinpointing the amount of risk one takes and I wouldn't call myself aggressive, yet a Financial Planner would.

I always had an "EXIT" strategy and a Plan A and B, however I'll admit my lack of experience in a recession and cycle has seen me lose ground.

Warren Buffett, Donald Trump would not be where they are without a high level of risk.

Let me throw this one out there:

"If we listened to our intellect, we'd never have a love affair. We'd never have a friendship. We'd never go into business, because we'd be too cynical. Well, that's nonsense. You've got to jump off cliffs all the time and build your wings on the way down." Annie Dillard

Regards JO

 

[BayView]

Yes, hindsight is a lovely thing. That's why its important to implement risk management in our investment decisions.

People who get into trouble investing is because they don't manage risk properly and can see their problems only with hindsight.

If you don't know whats coming up ahead, why would you go out on a limb.

As an old car racing line goes "to win the race you first have to finish the race." Which is like managing risk and is a good analogy.

Nicely said, Ev.

Because I can't predict the future, I always assume that everything will go down the chute, and plan accordingly.

Of course, I always have the optimism that things will go according to intended success plan.