G'day all,
My partner and I have 2 ip's with a combined mortgage of $730,000 and property values of approx $800,000. We pay principle and interest plus $600 a month on top. With interest rates going the way they are, could we afford to purchase another IP for approx. 200k? How to people keep buying when repayments goes up but your wage stays the same? Do wee need to target a cash flow positive property?
Cheers
tuggerwaughHi Tuggerwaugh
I believe you should always target positive investments. Ask yourselves if the interest rate go beyond 12% can you still afford the mortgage you already have, do the sums. If you have a good positive geared property in mind maybe selling a current investment to fund this one is possible. Always do the sums.
PhilPaying PI and paying extra means you probably could afford to buy another. Just cut back to IO.
BTW< if you still have a loan on your main residence, then you should not be paying PI on an investment. I wouldn't pay PI on any loans myself.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
We are living rent free in the NT so the two properties we own are both IP's. When we get our LVR down to 80% then we can pay IO so that will be the plan…cheers terry
Hi Tuggerwaugh
You pose an interesting 'dilemma'. What I'm going to suggest in respect of maintaining P&I rather than going straight to IO may seem to be counterintuitive to the traditional wisdom? But bear with me and think this through.
You say you have a mortgage of $730K and property valued at $800K. It appears this means you are already quite highly geared at the 90% mark. I think Phil's comment about looking at what would happen if interest rates kept increasing is a sensible consideration.
If you are currently paying P&I at present, can you sustain this with interest rates rises. I'd think carefully about shifting to IO as this would remove your disciplined buffer (if interest rates get too high, you could shift to IO from P&I). If you can afford to keep paying P&I, why not do so. There would probably be a few investors who went to the max LVR with IO loans, who might be regretting it now as they struggle to service their payments.
If having thought this through, you want to still proceed, you might want to hedge your strategy with some 'lateral thinking'?
Your strength at the moment is in servicing your liability at P&I levels (which is more than you need to pay). Perhaps you could find out whether your loans are 'portable' in respect of replacing one secured property for other property(s) of equivalent value. Assuming this is possible then you might want to explore selling one of your current lower yield performing properties and replacing it with two properties of the same value but with much greater yield (eg sell $400K property returning 4% for two $200K properties returning 6% or more. This should in theory improve your serviceability position. Then you might wait until interest rates peak and start to go down again and consider purchasing then. At that time, you might want to refinance a couple of the properties from P&I repayments to IO payments, and look for a negatively geared IO proposition that commits you to no more than you were previously paying at P&I.
In summary, extra property, improve your serviceability position, maintain your buffer, and purchase when the conditions are more favourable. Achieve this without spending anymore in servcing your loans/mortgages.
Ultimately the decision is yours no matter what anyone says. You have to own the success or failure.
Hope this has given you another view to think about.
G'day Abundance…
thanks for that info…. both IP's are negatively geared at the moment but both are increasing by approx. 10% per annum so the capital gains side we are happy with. I agree with you on the purchasing at the right time though, I think we might wait till the end of the year and see where the interest rates are heading. If I had my time again I may have purchased the two smaller properties instead of the townhouse but things have worked out not too badly over the last 12 months. Thanks again for your info Abundance. Cheers
Tugger
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