Finance advice
Pay down debt, interest rate hikes,

Amid possible interest rate hikes: Pay down debt instead of leveraging

By Bianca Dabu

Economists have recently been working with property experts and professionals to forecast the possible scenarios should interest rates start to hike following the amendments to lending regulations implemented by the Australian Prudential Regulation Authority (APRA).

While most experts agree that rates will start to rise soon, there are still those who believe that major banks like the Reserve Bank of Australia (RBA) will be on hold for the next couple of years.

According to Momentum Media’s James Mitchell: “Bill Evans from Westpac ... thinks that RBA [will have] … no rate increase at all … It's not going to go down, but it's not going to go up.”

Based on historical data of property market cycles, every time Australian property dips, the RBA cuts interest rates before it increases them again, and then lowers the rates once it got too high—and so on. James said that it has already been used as a lever before and it worked effectively, particularly when there was a dip in properties six years ago.

However, the mortgage expert does not expect the bank to do the same thing this year because cutting rates will most likely create problems that might be too much for them to handle at the moment.

He said: “Bill Evans from Westpac … goes, ‘But if [I am] wrong and they do increase … it's going to be a problem because there are people who are already stressed with the level of debt they've got even though it's held up by an appreciating asset [and] they're stressed with servicing that debt.’ ”

“Rates are at record lows. They've never as low as they are now,” James added. 

‘It could only get worse’

A lot of economists are worrying about the neutral rate set by the RBA, which is 3.5 per cent—”200 basis points higher, than where we are now,” James said.

According to him, it has been a bit bearish in the mortgage business particularly because property buyers, holders of the mortgage, and other customers in the market for the past five years have never known rates at normal levels.

He said: “If you've been using that time to pay down debt, that's great. But if you've been using it [for] leverage, then it could be a problem.”

Most people have done well in property over the last five years following the influx of new property investors who are putting positive pressure on prices to go up.

However, due to “record low-interest rates”, investors who used the period to leverage and overextend may start to encounter problems when interest rates hike.

Smart Property Investment’s Phil Tarrant said: “That said, APRA has pulled a lot of levers to persuade, influence, cajole … the banks to say, ‘Slow down on interest-only lending. Under 10 per cent growth, that's all cool, but serviceability ... for borrowers, banks … or lenders are looking at sort of [around] 7 per cent now.’”

“Hopefully, because of the way banks have been looking at borrower's potential to borrow money, they've put enough fat in it so, at [a] certain time, in terms of serviceability, if it does go up to that, that should be okay,” he added.

Investors’ education

Overall, the strong banking system of Australia is expected to withhold any scare tactics put out by the government or the central bank. Recent historical data will show that, essentially, the major banks are “too big to fail”.

Phil said: “One of the reasons we didn't fail during the JFC [Japanese financial crisis] is because of a very, very strong banking system, which was relatively risk-averse.”

Moreover, Momentum Media’s Aleks Vickovich explained: “We had less exposure to the economy and where the problems were. We also had lucrative stores of bulk site nine, or that we would flood into the China east.”

“The point is that the risks that we talk about … I think there's far more risks on the investor themselves than there is in for the banks,” he added.

The government ultimately backs major Australian banks, which are considered as key parts of the country’s economic stability. For this reason, experts advise all investors to take their education seriously in order to avoid making wrong financial decisions even if they essentially don’t have anyone looking out for them.

Many property investment journeys have been derailed over the years simply because of lack of education.

According to James: “Education is so important, and I've learned that through speaking to mortgage brokers and just through speaking to people who've recently bought property in the market.”

“The RBA and APRA [and] all those different bodies have said … ‘Don't get into the illusion that property only goes up. It can go down,’” he concluded. 

 

Tune in to Aleks Vickovich and James Mitchell’s episode on The Smart Property Investment Show to know more about politics, power poverty, rebalancing mortgage books and interest rates, as well as the recent policies by major banks hurting the property market, current monetary policies, and the reasons why there is a disparity in rates.

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Tune in to the latest episode of Property Showcase, the podcast with the inside track on the products and businesses that will help turbocharge your portfolio, maximise returns and make your overall investment experience seamless and stress-free!

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To hear more about these services, make sure to tune into this episode of Property Showcase!

 Make sure you never miss an episode by subscribing to us now on iTunes!

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Caifu Property\u2019s Automatic Equity program is designed to add a minimum of double the value of your salary to your portfolio every 12-18 months.\u00a0The program deals with five to six figures of instant equity, helps time poor investors generate equity in the shortest time possible without compromising your lifestyle or demanding your time.\u00a0<\/p>\r\n

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    In this episode of Property Showcase, Michael Beresford joins editor of Wealth James Mitchell to unpack why recent political changes are not reason for concern for Australian investors.<\/p>\r\n

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      More than just bricks and mortar, experts often regard property investment as a ‘game of finance’. As such, a good finance strategy can lead any investor to success.

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Many investors who would have been successfully approved for finance last year are struggling now to either begin or continue their property investment journey because of the current financial climate.

In this episode of the Smart Property Investment Show, broker John Manciamelli and Momentum Media director Alex Whitlock joins host Tim Neary to discuss how APRA changes and the royal commission have resulted in a tighter lending economy and what that means for Australian investors.

They discuss what traps investors should avoid if they are trying to obtain finance, the four key growth drivers in a property market and unpacking trust structures while revealing one type of trust that you should miss.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

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More than just bricks and mortar, experts often regard property investment as a ‘game of finance’. As such, a good finance strategy can lead any investor to success.

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When buying property, it’s important to focus on what’s important. Investor Katarina Taurian shares just what exactly is important to her: having the mindset of looking past superficial cosmetic matters and homing in on the structural suitability and potential of a property.

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In this episode of the Smart Property Investment Show, Katarina joins host Tim Neary to unpack her entry into the property market and experiences of rentvesting, and how the Smart Property Investment Show was vital  in a number of decisions which she made along the way.

Katarina discusses about the team that she had help her along the way, why she thinks that you should never skimp on a good solicitor and accountant, and the red flags which tell her why buying a new property doesn’t necessarily mean buying a better property.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

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More than just bricks and mortar, experts often regard property investment as a ‘game of finance’. As such, a good finance strategy can lead any investor to success.

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Why buying new property doesn’t mean buying better property

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