Holding property through a rate rise?

[Tim86]

Over the next few years it seems we may be hit with an interest rate rise or two.

I've only been investing in property since 2011 so I've only ever seen rate drops.

It's kind of a scary thought, rates going up. They only have to go up 2% and that will cost me an extra $476 per week!

I'm currently cash flow positive by about $335 per week. So it would easily get wipped out with some rate increases.

I'll be spending another $200 000 in the next 2 years on my ppor, that will get me $640 per week by renting some rooms downstairs, so it's a good investment. But it also means I'll be pushing myself right up to 1.44 million in debt. I'll also be investing another $100 000 in another property... so 1.54 million in debt. It's starting to feel like a lot of debt, and any rate increase is a lot of money. I'll hopefully be knocking $185k off of my debt when a house I hold 50% in gets sold in around 6 months. So that will offer some relief. But I'll be holding everything else for a very long time.

As I haven't been through a rate rise before, has anyone got any advice for people like me that will be holding a lot of property/debt through all the interest rate rises? What should I expect to happen with rents $, how bad will rates get, what will happen to captial growth, rental demand, purchasing demand, etc...?

Thanks

Tim

 

[datto]

As rates go up and less people invest in properties I think rents go up.

You could sell property to pay down debt.

Or go for fixed interest rates for say 5 years. By that times rates may becoming down. If they ain't then you can sell to off load debt.

 

[vaughan]

There is a book about the Volvo Ocean race where one of the boats is sailing around the horne, deep in the southern ocean in amongst huge icebergs. Their course takes them between two 'bergs. One of the junior crew asks the skipper "what if they bigger underwater and are joined in the middle?" The skipper turns to him as says "Then we are going to die."

Advice? Plan for it now. Keep cash at hand. Don't leverage so much.

Those who are prepared will eat the lunch of those that aren't.

 

[Singo]

It is all about being prepared.

If you are cashflow positive by $335/week now. So an extra $476 interest rate payment means, you gotta pay $141 per week out of pocket. Or less than $100 per week after tax. Say $5,000 a year. Not really big money. Hopefully the rents will increase. Even if rents don't increase for 5 years, all you need is 25k to hold on to the portfolio. If you can get an equity loan or Loc now for that amount, you can manage. Fixing rates may be an option as well. If you can get $640pw, addtional debt of 200k is not a big deal either. Actually boosting cashflow.

The biggest thing one should be prepared for is maintenance costs I reckon.

 

[Colin Rice]

If you can get an equity loan or Loc now for that amount, you can manage. Fixing rates may be an option as well. The biggest thing one should be prepared for is maintenance costs I reckon.

If your LVR permits as well as serviceability then take Singos advice and gear up to 80% (or more depending on risk profile) as this will enable you to have buffers in place to mitigate your expressed concerns.

Go to bed Singo, you have work in the morning

 

[Deltaberry]

Save up your positive cashfow so you have a buffer when rates rise, and hopefully you'll have saved enough to reduce your debt by the amount needed to break-even despite a few rises.

 

[citystar]

A decent amount of cash savings in the bank for a rainy day if the best, preferably in a 100% offset account linked to your PPOR (non-deductible debt). Fixing your interest rates may work for some but it can restrict flexibility to play with the loan when and if the property prices rise and you wish to draw equity or refinance down the track.

 

[Peter_Tersteeg]

You'll find that as rates rise, rents eventually do follow (it's usually not instant, but it does happen). As the rates drop, the rents stay up so whilst you might go through a little pain, you come out the other end much better off.

Rates rising are often a reaction to an increasing market, so you may also find that your property values are increasing around the time the rates are rising. At some point the rates may get too high and prices will stagnate and possibly drop a bit.

This part of the cycle can drive a rate drop. At that point you're getting good rental income and eventually property becomes interesting again which cases values to increase again.

This is all part of the cycle. Having good cash flow now is great, but don't be too afraid of being a little bit negative cash flow for a period. Plan for it and build a portfolio that can take advantage of all parts of the property cycle.

 

[TMNT]

so it seems that as a general rule, the best time to buy is when rates are near the bottom, as its cheap money as well as increased rents followed by CG

while the worst is just before the peak of the rates, as you've already got CG and increased rents, and the only way to go is down or flat for prices and rents

 

[tobe]

rates are high, time to buy, is the adage I think.

Because when rates are high, prices drop relatively, as those able to afford higher prices diminishes.

 

[vaughan]

rates are high, time to buy, is the adage I think.

Because when rates are high, prices drop relatively, as those able to afford higher prices diminishes.

Yeah... I was in my 20s when the rates hit 18% (or whatever they were) and people were *scrambling* to buy something just to get into the market.

 

[Peter 14.7]

As someone from the 80s I say ignore that time.

Learn from it but ignore as the rules are changed.

Fix if you want security. But it means you cannot sell as easy.

Losing your job / income is the greatest risk by far.

Regards Peter 14.7

 

[Scott No Mates]

As I haven't been through a rate rise before, has anyone got any advice for people like me that will be holding a lot of property/debt through all the interest rate rises? What should I expect to happen with rents $, how bad will rates get, what will happen to captial growth, rental demand, purchasing demand, etc...?

Thanks

Tim

It's called negative gearing. Join the rest of us.

 

[travelbug]

It's obviously worrying you so why not fix a few loans so you have some security while still having some as variable in case you want to sell.

I've fixed some of mine and left a few that I may sell in the next 2 years as variable.
You are in a good position where you are CF+ at least. Some people are negatively geared even with these low interest rates. They are the ones that need to be worried. A lot of people are going to be hurting when rates get back to normal. God help them if we have high interest rates.

 

[Tim86]

Thanks for all the replies. It does help me to get a bit more of an idea.

We got the loans while we were on dual income, but we are now down to one income (this was our decision though, wife hated her job and now we are trying for kids). I'm currently on about $60k after tax with my job and it is extremely secure. Ttechnically the amount of money I have borrowed from the banks right now I don't even have by their calculators enough income to pay the loans... as they don't count rental income that highly and more than 50% of my income is rents.

We aren't saving anything right now though as it's all going into our PPOR and IP's. After all of our expenses we could save about $300-$400 per week right now. So we aren't in too bad of a position. One loan for about $175k is locked in at 5.3% interest for the next 2 years. The others are variable. I like the flexibility of the variable loans and I'm not too convinced that the fixed loans would be much benefit due to the extra fee's involved. I've also got a lot of loans through my parents (for the deposits) and I pay whatever their variable rate is...I can't really lock in a rate with my parents unfortunately

I've only got about $160k equity in my properties...so currently 12% which isn't a huge buffer. After spending another $300k I'd expect in total my debt to be $1 540 000 and total value of my properties to be $2 195 000 so $655 000 equity which is more like 45% equity which is a much better buffer.

Once my income is up more, due to increased rent from upcoming projects (development and ppor extension/rent) I'm hoping to then be able to refinance my properties, so it would be good to be on a variable rate to have that option. Once I get the extra finance I could start looking for my next project (and also pay my parents back the deposits that I owe them).

Anyway that's the grand plan. A rate rise will just make things a bit more difficult for a time. As long as everything goes to plan I should be fine... so fingers crossed

 

[perthguy]

Something to consider is setting up an offset account against your PPoR. Gives you the flexibility of saving interest but having access to cash in case you need it. As an example, I have $135k sitting in an offset account against a fully offset PPoR loan. The loan has no fees, the offset account has no fees and the interest rate is good if I even need access to the cash. This is my first line of defence if things go sour.

 

[joeExpat]

Imagine the poor variable rate mortgage holders in Turkey last night .. the central bank pumped up rates 425 points in one hit to 12%. Will certainly put a dampener on their property market.

http://www.abc.net.au/news/2014-01-...-interest-rates-in-response-to-curren/5224766

 

[Chris B]

Over the next few years it seems we may be hit with an interest rate rise or two.

I've only been investing in property since 2011 so I've only ever seen rate drops.

It's kind of a scary thought, rates going up. They only have to go up 2% and that will cost me an extra $476 per week!

I'm currently cash flow positive by about $335 per week. So it would easily get wipped out with some rate increases.

I'll be spending another $200 000 in the next 2 years on my ppor, that will get me $640 per week by renting some rooms downstairs, so it's a good investment. But it also means I'll be pushing myself right up to 1.44 million in debt. I'll also be investing another $100 000 in another property... so 1.54 million in debt. It's starting to feel like a lot of debt, and any rate increase is a lot of money. I'll hopefully be knocking $185k off of my debt when a house I hold 50% in gets sold in around 6 months. So that will offer some relief. But I'll be holding everything else for a very long time.

As I haven't been through a rate rise before, has anyone got any advice for people like me that will be holding a lot of property/debt through all the interest rate rises? What should I expect to happen with rents $, how bad will rates get, what will happen to captial growth, rental demand, purchasing demand, etc...?

Thanks

Tim

There will be a lot of people in a similar situation to you (although most will be working with smaller numbers and probably not actively thinking about the risks). Lots of home owners under 40yo don't seem to realise that interest rates can easily go above 7%. One of the risks is that if rates do quickly go up by 2-3%, then there will be a lot of people looking to sell, the bubble will burst and prices will fall.

As you've said, you are heavily reliant on the rental income, so hopefully you have bought well and your properties are diversified. There is a reason why banks don't include 100% of rental income and would be uncomfortable with your current level of debt.

If one property was vacant for an extended period, you would be fine but you should have a plan (and cash reserves) for the possibility of a combination of some loss of rental income with rising rates (and the added expense of having children). Things can and will go wrong at some point, so you should make sure you have suitable insurance to protect yourself where possible.

 

[Peter 14.7]

You are on a great path and a good start.

Cover your risks.

Have good (read EBM or Terri Scheer) Landlord Insurance not cheap like AAMI.

2 year fix is not that good IMO. Essentially you are fixed in the very period it is low. In two years it could be going past 6.5% and then you are out? but really who knows???? in 25 years IP investing I have learnt no-one knows, you fix or not to suit your risk profile, not the market expectations.

Personally, I would fix for 5 years if you really want peace of mind.

Watch the lower income service equation, get a LOC as discussed.

Regards Peter 14.7

 

[landlubber]

Get the biggest LOC you can get.

Before we get any IR rises we should get some capital growth. So first line of defence is revalue when you think the time is right and get the biggest LOC you can get. You don't have to use it, just have it there.

Having said that .. I think any rise in OZ IRs will be "very interesting" indeed. USA has zero IRs and has telegraphed loud and clear that they will remain zero well into the future. Not only that, the US simply cannot afford higher IRs due to the huge and growing debt levels. (At the same time US needs inflation to solve it's debt problem, so figure that one out ...) Uncle Glenn (and every Australian worker pretty well) wants a lower AUD and any IR rise that is "out of step" with the USA will drive the AUD up as I see it. It's all going to get very interesting. Expect a LOT of jawboning before IRs actually increase. LL