Is six and a half the new nine?

With interest rates so low, and fixed rates at the same level, we are seeing a strong property market in many areas in Australia. And those markets not experiencing it yet, soon will.

And with low interest rates comes an increase in consumer confidence and a fear of missing out.

With a housing shortage, people are making ridiculous offers on properties, well above where their true value sits.

This fear is pushing people to borrow up to their maximum borrowing levels that the banks will give them.

Sure, we as mortgage brokers have been acting morally and suggesting that they fix their rates to give them security, but what happens when these fixed rates mature and they convert back to variable? And what if at the time that variable rate is 6.5% or higher?

Whenever I invest, I do my sums on affordability at 9%… yes, 9.

wHy?

I do this because from here, there is nowhere for interest rates to go except up!

We haven’t seen interest rates higher than 9% since the early 90’s… now sure, it’s a possibility that it could go over 9%, but it is unlikely.

The reason for this is our debt to income ratio.

When I purchased my first unit in Cronulla in 1993 interest rates were on the downturn from the 18%’s we saw. My rate was 11.75% and I thought that this was normal, as I knew no better. The interesting fact here is that our loan repayment was around 20%-25% of our net income.

This reason alone meant that we could easily make the loan repayments. In fact we smashed the loan, making double and sometimes triple repayments.

Now though, we are seeing this ratio hitting up to 60%… there is no room for error at this level. No contingency room for interest rate rises, job losses or the ability to have a child.

Anything above 40% and money gets tight.

Lenders are allowing us currently to borrow up to 45% of our net income to put towards a mortgage. With interest rates only going to head north bound in the future, this is scary for those borrowing their maximum.

Responsible lending practices keep a tight reign on the banks. They service debt for borrowers at 6.5% to 7%. This allows for interest rate rises. But their greed for market share, allowing borrowing levels to this extent, are too high in my opinion.

Even when we lease properties to tenants we do our servicing at 33% of their net income. This level allows room for our rental increases, which don’t get complaints. At 45% plus, the tenant will always say they cannot afford the increase or move on. And honestly, they are spot on…

Now combine that with a property market that will cool off, and we could be in for some darker days ahead. Buying property now in Sydney or Melbourne is nothing short of insane. Purchasing a home or investment property makes no difference.

Why would you invest in property at all if you know that the property market is going to cool off and property values are going to decrease?

None the less, I will be in the wings… waiting, biding my time, til the Sydney market cools off, decreases in value and the bargains are ready for the pickings…

So be smart and get good advice before making offers… use your head, not your heart!