It might seem a bit rich when a major bank executive is warning property owners to watch their mortgage repayment pennies.
But that seemed like the thinly veiled message Commonwealth Bank CEO Matt Comyn was sending last week, when he admitted borrowers are likely to struggle if (and when) interest rates rise again.
The Chief Executive of Australia’s largest bank and home lender, who makes a cool $3.4 million a year, told ABC’s 7.30 program, “We don’t have any concerns in the context of the overall health of that debt, and for customers being able to repay that.”
Before quickly adding, “Obviously that’s contingent on interest rates remaining low.” Hmmm…
How long and how low?
Herein lies the conundrum really. This indefinite interest rate limbo seems to be going nowhere fast, on a global scale.
Just how long we can anticipate interest rates to remain at all-time lows, or potentially be cut further, is anyone’s guess. As is, it seems, exactly what’s going on with the world economy.
Financial markets appear to be in perpetual gridlock, with little to no movement, which could explain why the Reserve Bank and other government regulators are encouraging as much full steam ahead for the housing markets as they possibly can.
You want low interest rates? You got ‘em! You want less argy bargy from APRA around banking policy and lending criteria? Here, have that too! Just spend your money somewhere, for crying out loud!
Obviously the hope is that people will start to spend once more – on things other than the bare essentials, like shelter, food and clothing – in order to stimulate the economy.
When that happens, the RBA will once again have to carefully weigh and measure inflationary signals and potentially start to move interest rates back up, as the traditional economic counter balance.
A little worrying
Australia’s household-debt-to-income ratio recently hit a record high 190 per cent, representing the highest in the world after Switzerland.
We can also boats one of the world’s most expensive cities for real estate, with Sydney coming in third, just behind Hong Kong and Vancouver. And according to CoreLogic’s October data, Australia’s median house price is now an eye watering $918,314.
What all of this translates to, is that acquiring the Great Aussie dream now requires 11 times the average, annual full time salary earned in this country of $85,000.
Nevertheless, Comyn reports that most borrowers are comfortably servicing even rather sizeable loans, with a little extra cream on top.
“If you look at serviceability of that debt, we’re seeing more than three-quarters of our customers are well ahead of their repayments,” he said.
That’s all well and good while interest rates are at an all time low of 0.75 per cent, after another record breaking rate cut from the Reserve last month, and some standard variable home loan rates are close to 3 per cent.
However, there’s still that nagging uncertainty as to what might happen when things swing back the other way one day.
5 ways to protect your portfolio
It’s all well and good to make hay while the sun shines, or in this case, acquire properties while interest rates are at record lows, but any investor worth their salt will be well prepared for the many variables surrounding real estate. Including rogue interest rate rises.
1. Stay within your comfort zone. First and foremost, never overstretch to the point where you’re having trouble sleeping at night. Regardless of what lenders say you can afford, you have to know your repayments are indeed do-able. Not just according to current rates, but potential future projections too.
2. Know the value of what you’re buying. Make sure it’s an asset that will appreciate appropriately, and hold its now in various market conditions. Do your sums, know your location and don’t over-capitalise at the outset.
3. Always maintain a healthy buffer. If you’re spending every cent of your rental income and still struggling to break even, or finding it difficult to meet maintenance and management obligations due to a strain on the budget, then you could be in a world of hurt when rates rise. Always make sure you can maintain a cashflow buffer, for extra peace of mind should anything go pear shaped.
4. Talk to your mortgage broker about optimal debt structures. Property investment is a business, and should be treated as such if you want to ensure long term success and prosperity. An experienced mortgage broker who understands how to optimally structure your loan portfolio can be an invaluable asset and ally, potentially saving you thousands. Less profits in the pockets of the big banks, and more money for your all important security buffer!
5. Invest according to your ‘life stage’. If you’re approaching those golden years of retirement, now might not be the best time to lock yourself into a home loan that could conceivably require 30 years of contributions out of your own pocket, on top of any rental income. Be aware of the ‘seasons’ of property investment and smart about the level of debt you take on, at any given time.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).