Cashed-up baby boomers flush with equity make property investing look easy, but don’t be hoodwinked into thinking it’s a lay down misere, warns Sally Tindall.
Yes, the last few years of record-low rates and record-high growth have put most investors in a good position, but these perfect stats are starting to fray and investors who haven’t planned for the future might find themselves falling short.
One of the biggest mistakes you can make is taking out a mortgage you ultimately can’t afford. The keyword here is ‘ultimately’ because if you’re just scraping together your repayments now, chances are you won’t be able to keep it up if interest rates will rise in the future.
Plus, not enough rope on the purse strings means there are no funds to spare for unexpected problems, such as a problem tenant or a special levy you didn’t see coming.
If you were forced to sell the property earlier than planned, any capital gain might be swallowed by the stamp duty fees you paid on the way in and the real estate agent’s fees you’d have to pay on the way out.
You would also have to consider the opportunity cost – that is, how much money you would have made if, instead of buying the property, you’d invested your money some other way.
Life has been getting harder for investors
If you’re an investor, chances are you’ve already had at least one letter from your lender letting you know your rates have gone up as a result of the requirements from APRA for banks to limit growth in investment lending.
Over the last six months, average investor rates have climbed from 4.59 per cent to 4.77 per cent, while the rock-bottom loans of 2016 are significantly harder to find this year – despite no change in the official cash rate – particularly if you’re after loans that allow you to make interest-only payments.
|Date||Average rate for investors (advertised rate)||Number of loans under 4 per cent (advertised rate)|
|May 2017||4.77 per cent||72|
|April 2017||4.73 per cent||72|
|March 2017||4.67 per cent||128|
|February 2017||4.62 per cent||155|
|January 2017||4.61 per cent||155|
|December 2016||4.59 per cent||182|
With more investor rate hikes likely to come in the second half of 2017 as banks capitalise on the edict from above, and a potential RBA increase on the cards in 2018, the question is, could you afford your mortgage if rates hit 7.5 per cent?
Things can change fast in the mortgage world
To help answer that question, let’s crunch the numbers. Imagine you have 25 years left on your mortgage and still owes $350,000. A rise from 4.5 per cent to 7.5 per cent will be an increase of $641 a month – or $7,692 a year.
Would you be able to cope? If not, it makes sense to start thinking about ways to pay down your debt now.
Don’t make the mistake of assuming it would take years and years before rates could reach 7.5 per cent. As the first table showed, the average rate for investors has increased by 18 basis points in the past six months – even though the cash rate hasn’t budged. And speaking of the cash rate, the Reserve Bank raised it by 175 basis points between April 2006 and March 2008.
The point is this: big movements can happen in short periods of time.
Could you pay your mortgage if rates hit 7.5 per cent?