who has these $400k mortgages ?
- Thread starter WillG
- Start date
It's worth remembering here that the real value of your mortgage payments drops with inflation. Although people may be pushing now to pay their 'big' mortgages, in 10 years time not only will the property be worth a lot more, but the proportion of your income used to service the mortgage will have dropped. To my mind, this is the biggest advantage of buying over renting. I tend to be a 'less now, more later' type of person, so I am quite comfortable taking on a debt for an appreciating asset.
The would be the main reason why it's better to buy then rent for MOST people. If the didn't buy a PPOR they would never buy assets.
For investors like us, though, the choice is often between buying a PPOR or renting and buying IPs. Assuming equal growth rates, when yields are low it's better to rent and buy IPs.
Alex
For investors like us, though, the choice is often between buying a PPOR or renting and buying IPs. Assuming equal growth rates, when yields are low it's better to rent and buy IPs.
Alex
This is not 100% true. I had an issue with this concept ( surely the banks weren't that stupid) and took some time to do a bit of homework.
Apparently future inflation is allowed for in the interest rate you pay the bank. This is another function of increasing interest rates to allow for higher future inflation.
Opinions?
Apparently future inflation is allowed for in the interest rate you pay the bank. This is another function of increasing interest rates to allow for higher future inflation.
Opinions?
Assuming, over time, your net rent = or > interest paid. The longer you hold the property, the more likely this will be the case, even taking into account the time value of money, since rent increases.
Assume you start with 100% LVR. Assume the property goes up purely because of inflation (i.e. 'real' return of zero). At the end of x years, you will have some net assets. No matter what amount that is, that's still more than you started with (since you started with zero). That's pure 'inflation gains'.
Every interest rate has inflation expectations built into it. But a bank doesn't really care what the 'real' rate is either, since their profit from loans is from the spread between their funding cost and the interest they charge customers.
Why are the banks stupid? Barring loan defaults, they make a spread month in, month out, and we take all the risks of owning property.
Alex
The banks aren't stupid, as they make money from lending money at a higher rate than it costs to borrow the money on a wholesale basis. If the asset securing the loan rises in value, so much the better, as the bank has a higher likelihood of recovering the full value of the debt (potentially plus costs) if it all turns to poo.
Although the interest rate has inflation expectations built in, the fact that equity grows through inflation is evidence (to me, anyway), that the real cost of owning the asset decreases over time, regardless of increases to rental return and nominal asset value.
Alex, i think the gain you are referring to is from leverage. ie: 100 LVR plus of course inflation.
If everything else goes up in value, so does real estate. And I understand the banks make money with their spread.
All the baove is a given, so what i'm saying future inflation is built into the interest rate so that say, if future inflation was zero, the banks would be lending money at their wholesale cost + their spread + 0.
If future inflation is say, 10% they would be lending money at their cost + their spread + 10%.
So we are not really getting future discounted money as such as most think we are. Agreed?
Any economists on the forum?
If everything else goes up in value, so does real estate. And I understand the banks make money with their spread.
All the baove is a given, so what i'm saying future inflation is built into the interest rate so that say, if future inflation was zero, the banks would be lending money at their wholesale cost + their spread + 0.
If future inflation is say, 10% they would be lending money at their cost + their spread + 10%.
So we are not really getting future discounted money as such as most think we are. Agreed?
Any economists on the forum?
I agree with all of the above. By borrowing money we are getting 'future' money 'now' (that is, we get $100k now and pay $100k in 40 years, and so 'gain' the time value of money). The benefit of that is balanced by the fact that we have to pay interest (which has inflation built into it). But then the point is whether the 'return' you get from that $100k exceeds the interest rate. i.e. net rent + appreciation. THIS is the part where inflation is irrelevant. As long as net rent + appreciation > interest, it doesn't matter what the inflation rate is because all three variables already include inflation.
Yes the gain is from / increased by leverage. But my point is that REAL return doesn't matter on the geared portion of your assets because inflation has the equal and opposite effect on loans.
Alex
I'm curious - where does the $ come from? Did you know that you're going to get that money when you bought the place?
I'm also in the league that has 400k+ mortgage (PPOR, townhouse). For me & partner the most difficult part is deciding to take the plunge. We both never owe money and the 1st time it has to be that much
.We're still using variable even after the latest interest rise. There's limit where we start sweating if another rise is coming (at which point we'll go fixed-interest). So far we're concentrating on having as much as possible in the offset account.
That said, I completely understand if First Buyers are missing the boat. Not everyone can live under budget that makes Scrooge McDuck proud.
Alex, I would spend far more money in petrol getting anywhere I want by buying a house for a little less in Cooloongup, it is a long long way from the city, and our workplaces. Good for people who work in Rockingham.
It will also see far less in CG, than the relatively cheap suburb that I live in 11km's from the city.
Yeah, but it's still a house under 400k in Perth. So there ARE houses in perth under 400k. Not nice ones, maybe, but they exist. I agree it's a long way from the city (I did the drive for the first time early this year), but if that's all first home buyers can afford, at least it's a start.
Alex
Sale of other assets at first, then over the next year a very targeted debt recycling effort.
If the variables are going up, you have probably missed the fixed rate boat! Maybe part fixed, but I wouldn't be taking fixed just now.
I live in Perth and have a $500k mortgage. I have some investment properties and the plan is to hold off for another 3 years until one of my units is worth $500k and then sell it to pay off the mortgage. I put $20,000 into the investment property and the place is cash neutral. I can put up with a few years of hardship as I will have a house worth $1m, which will have cost me $20K and 5 years of time instead of 30.
It seems like a good plan to me but I'm open to suggestions.
It seems like a good plan to me but I'm open to suggestions.
Personally, I don't intend to sell any of my IPs to pay off the PPOR mortgage. Sure it's not tax deductible, but that just means I'm paying 11% or whatever on my PPOR (equivalent). Over the long term my IPs will return more than that. I'm quite happy to just keep what I have, keep buying more IPs, and just slowly recycle the PPOR debt.
I don't see owning an expensive PPOR debt free as a goal in itself. The goal is to have free cashflow from investments to support my lifestyle. The house is a function of that, not an end in itself.
Alex
Yes, but to sell an IP to pay off deductible debt, and then re-borrow to buy IPs again..... I'd have to look at the numbers a lot more. CGT, agents fees, etc. really add up.
Alex
We bought our first PPoR in '98 for 96K. It was our third property purchase. Paid 88K deposit and borrowed 10K from the parents to cover the balance and the 2K of closing costs. Nice not having to involve a Bank.
It was 3x1 B/T on a triplex block, 11km from the city in a hovel of a suburb.
Paid the parent's back in 2 months and threw a title deed party.
That was 7th of May 1998 when we paid it off. I remember it like it was yesterday. It was bolded and highlighted in yellow flouro pen in my diary. We were both 27 at the time and on our way up the food chain.
Still own it today and it's worth about 600K.
More importantly, we haven't paid a cent in NTDD (unproductive interest) since.
Obviously we've moved onwards and upwards from there....but looking back it was definitely the right thing to do...start modestly is my suggestion.
400K or 600K mortgages on PPoR's are mind blowing to me. It must crush your creative investment spirit.
(BTW - it looked absolutely nothing like this when we bought it....you wouldn't have kept your cat in there to start with. Took 6 months casually working on weekends and about 5K to tart it up. But then, what else does a young guy with kids do on the weekend.)
It was 3x1 B/T on a triplex block, 11km from the city in a hovel of a suburb.
Paid the parent's back in 2 months and threw a title deed party.
That was 7th of May 1998 when we paid it off. I remember it like it was yesterday. It was bolded and highlighted in yellow flouro pen in my diary. We were both 27 at the time and on our way up the food chain.
Still own it today and it's worth about 600K.
More importantly, we haven't paid a cent in NTDD (unproductive interest) since.
Obviously we've moved onwards and upwards from there....but looking back it was definitely the right thing to do...start modestly is my suggestion.
400K or 600K mortgages on PPoR's are mind blowing to me. It must crush your creative investment spirit.
(BTW - it looked absolutely nothing like this when we bought it....you wouldn't have kept your cat in there to start with. Took 6 months casually working on weekends and about 5K to tart it up. But then, what else does a young guy with kids do on the weekend.)
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There might still be value in this IF
The new investment provides a greater return or capital growth to offset the buy/sell costs. (That is the existing IP is a real dog with fleas, no prospects and a penchant for digging up your prized roses... AND the new IP is such a good deal that not doing it would be stupid).
I think NEVER sell is overstating the downside of selling. I would say though that you should REALLY THINK ABOUT IT before selling
No-one ever went broke making a profit
TB
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