Should we make extra repayments?
YES this is the BEST CURE it is like applying a first aid kit to the wound and this is what I would suggest you all to do. Think about this,
IF you can afford to fix your rates at say 7% THEN why would you not stay on the lower rates and make extra repayments that will actually bring your principal balance down instead (ELSE) of giving it away to the banks by getting charged higher fixed rates? (I love this theory IF THEN ELSE)
IF the time comes and rates have increased higher and higher THEN your balance should be lower than what it should be. Therefore at the end of the day even though your rate is up to the highest point, your balance will be lower SO interest will be calculated on the lower balance. REMEMBER, I have told every one of you that INTEREST is calculated daily on the daily closing balance. ELSE you are being generous and making the banks richer by donating more interest payable to them than what you are supposed to.
The SAD thing is, the money that goes to interest is after tax money and not tax deductible, unless you are an investor the interest payed could be a tax deductible expense. But still even though you can claim on tax, isn’t that money better off sitting in your account adding to your equity or your line of credit right?
Do we fix our rates?
It is up to you but I would not suggest fixing rates at this point of time as fixed rates are very expensive. Warning: YOU COULD MAKE IT WORSE.
Here is the fact: Banks always win no matter what, the bank’s fixed rates have always been higher than the variable rate ever since the rates dropped. Bank’s fixed rates were at the same level with the variable rates back in 2007/2008. The variable rates were about 7,1% and the fixed rates were about 7,15% for 3-5 years.
Customers who fixed back then were benefiting in the first few months but later in early 2009 rates dropped significantly to as low as 4,87%. So those customers did not get the benefit when the rates dropped. Now looks like rates are on its way up again but we don’t know how fast and how high it will go up to?
But one thing for sure is that the government issued the First Home Owner’s Grant Boost of up to 21K and rates were about 4.87%-5,7% before last week. FHOG lured homebuyers into the market. Just like how it happened back in early 2000 when it was the 14K FHOG housing boom.
These first home buyers were tested on a benchmark of 7,5%-8% by most banks. My conclusion is that if rates go up more than 8% then these home owners will suffer from what we called mortgage stress or possibly forced into selling their homes. This has happened in 2007-2008 as we all know and it was exposed in the media.
The result of that was increase in rental prices and housing shortages kept continuing.
I guess you all can take advantage of any kind of situation in this industry.
Wise Investors will be happier if rates go up as rent also goes up. Less people will be able to afford to buy homes and more will prefer renting. Thus Renting demand goes up and rent price also goes up. That is the basic theory of price vs demand. Many first home buyers think this way, “I will not buy a house if rates are very high as there are other expenses such as water, rates, strata levy, house maintenance cost etc. Renting a unit has almost none of those expenses”. This is what causes property prices to drop when rates are high.
When rates are already at its peak and on the way down then that would be a good time to get a bargain from desperate sales or at auctions etc.
Do we cut down our expenses?
IF you can THEN Yes! Use the extra money towards your mortgage
Do we increase our rent and pass it onto tenants?
The nature of investment is to get higher returns possible so the answer to this is YES, when you believe there is room to increase. Please consult this with your managing agent if the price is appropriate as you don’t want to scare your tenants and create a vacant investment property. Remember, my theory is that having lower rent and a low vacancy rate is better than having higher rent and a high vacancy rate.
