All Topics / Help Needed! / I no longer want to be a slave…………….

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  • Profile photo of bjwilsonbjwilson
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    @bjwilson
    Join Date: 2007
    Post Count: 1

    Hello everyone,

    I am a slave to my mortgage and know I could be doing something more positive and productive with my portfolio, initially I invested to attract less tax in my pay everyfortnight, now I want to work less and decrease my debt, I'm 45.  I would be grateful for your advice………………here goes

    I earn 90k, plus rental income from 2 property's, negative gearing, and pay a mortgage on the house l live in, I am at 80% borrowing capacity and feel l am not manageing my portfolio as good as l could?? any thoughts??

    213k owed (the house I live in)…value 260k

    135k owed IP…………value 190k

    233k owed IP………..value 280k

    many thanks 
      

    Profile photo of ducksterduckster
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    @duckster
    Join Date: 2004
    Post Count: 1,674

    Your PPOR house is not tax deductible so if you could make extra repayments on the non investment mortgage  any savings in interest are  worthwhile. For example say you managed to repay an extra $5000 you save at 7% interest the charge of  $350 a year.
    Iif you are taxed at 40% you have really saved $583 because you would have to earn $583 to have $350 to pay the interest that you have saved having to pay.

    Profile photo of MortgagemanMortgageman
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    @mortgageman
    Join Date: 2004
    Post Count: 164

    Hi BJ,

    Does your PPOR have an offset account? If so, you should be paying everything you can into the offset account or straight into the loan so that you're PPOR repayments are as low as possible. As Duckster said, the key is paying down the PPOR debt as quickly as possible as it is not tax deductible.

    Kind Regards,

    Cameron Perry
    Director
    Perry Financial Strategies
    Level 13, 30 Collins St
    Melbourne VIC 3000

    Profile photo of foundationfoundation
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    @foundation
    Join Date: 2005
    Post Count: 1,153

    You've defined your problem as:
    * I am a slave to my mortgage

    You have defined your goals as:
    * Want to work less
    * Want to decrease my debt

    If you sold both investment properties and put the remaining capital into your PPOR, you’d reduce your debt from $581,000 to $131,000. That satisfies the second goal.

    The first goal is a little more difficult, but if you used the above strategy to tackle your first goal, you’d reduce your mortgage costs from around $25,000 per year to around $11,000 per year. This saving of $14,000 might enable you to take extra leisure time. Alternatively, it could pay off your PPOR in less than 6 years, then you could cut down on work (or save this $25k per year).

    If the good folks here are correct when they tell me that house prices double every 7 to 10 years, you’d have one $520k to $675k asset and $120k in cold hard cash (growing by $50k+ pa and more each year thereafter) by age 55. And if they’re wrong about the growth in house prices, at least you won’t have wasted money by holding 2 negatively geared investments for a decade!

    Disclaimer: None of this is intended to be financial advice, but if it is taken as such, feel free to sue me in the future. I was only trying to make sure you got a well-rounded set of opinions, rather than just “good debt is best”! ;-)

    Cheers, F. [cowboy2]

    Profile photo of DobbyDobby
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    @dobby
    Join Date: 2005
    Post Count: 37

    You could check out the cashflow mortgage product from investors direct:

    http://www.investorsdirect.com.au

    Can borrow up to 85% at starting lower interest rate and then refinance every 2 years as the properties double.

    This should give you some extra cashflow.

    Profile photo of foundationfoundation
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    @foundation
    Join Date: 2005
    Post Count: 1,153

    "refinance every 2 years as the properties double."

    You seem to have missed one of BJ's stated goals: "I want to […] decrease my debt". You're suggesting he capitalises his costs, which is a high-risk strategy guaranteed to increase his debt?

    Profile photo of HandyAndy888HandyAndy888
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    @handyandy888
    Join Date: 2005
    Post Count: 160

    I guess there are many many things you can do, especially with a 90K/year job. Here are a few scenarios:

    1. Re-evaluate your IPs…how much are they negatively geared? Are they your best options? Could you sell and do better?
    2. Sell one IP, reduce your debt on the second IP. Does this turn your one IP into cf+?
    3. Invest more of your money. At $90K, you should easily be able to diversify your portfolio. Look at your disposable income.
    4. Value-add. Spend a bit of money to increase your IPs values and perhaps pick up another loan.
    5. Check who you bank with…I had to go to a few brokers before I could acquire my 4th IP (a block in Tassie).  Our initial "trusty" broker said we couldn't do it,  so we went to someone who said we could…I can give you his  number  if you wish.
    6. Put more money into your PPOR.

    Just some options…be creative, use maximum equity and "play" with your IPs…

    Profile photo of DobbyDobby
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    @dobby
    Join Date: 2005
    Post Count: 37

    Sorry – what I meant to say was you could refinance every 2 years as the property prices increase (will take 7-10 to double!).

    You don't necessarily have to reduce your debt to work less. Provided you have bought well and the properties are appreciating the average 8-10% p.a. the 85% cashflow mortgage will work well. It is more risky than a standard loan as you are capitalising the interest but it will provide for less mortgage payments for the first 2 years and as long as you refinance after that – well into the future. As long as you keep enough of a buffer in your offset account i.e. at least one year's interest payments (to cover slow appreciating years) – by refinancing regularly you should be ahead of the game.

    As rents rise over the next few years due to low vacancy rates accross the board, the increase in your overall debt should be slightly offset. Definitely not a strategy for everybody but something to consider as a "thinking outside the square" strategy.

    Profile photo of foundationfoundation
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    @foundation
    Join Date: 2005
    Post Count: 1,153
    Dobby wrote:
    the property prices increase (will take 7-10 to double!).
    <snip>
    the properties are appreciating the average 8-10% p.a.
    <snip>
    something to consider as a "thinking outside the square" strategy.

    Sigh. Oh dear.

    foundation wrote:
    And even if they turn out not to be entirely deluding themselves, they might simply be abusing mathematics. For example, by assuming house price growth is exponential* (based on a poorly fitted historical function), and entirely disconnected from real drivers, such as wage growth…

    What happens if we project an exponential trend when that trend doesn't exist? Reality fails to live up to expectations:

    * An example of this would be parroting "house prices double every seven to ten years", which not only assumes exponential growth, but assumes that only price and time are relevant. Something like "historically, house prices have tended to track slightly higher than wages, but this gap has been bridged by increasing mortgage debt" would be more accurate…

    Anybody needing a refresher on exponential (compound) growth versus other functions? Here ye go:

    Next time somebody tells you that house prices have "grown by 9% per year on average over the last 10 years", ask them to point to which one matches house price growth…

    Cheers, F. [cowboy2]

    Profile photo of DobbyDobby
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    @dobby
    Join Date: 2005
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    Foundation:

    So you're saying that if you buy a property in an area that has achieved 10%+ average growth over the last 20 years you don't expect that trend to continue?

    You may as well give the game away now and go top yourself with that attitude! There's being realistic and there's being a cynic – which one are you?

    I know what you're trying to illustrate but you're missing the point which is – if you buy well placed property that has exhibited strong growth in the past there is a likelihood that the growth will continue in the future. Correct?

    Try and pick a hole in that one Einstein!

    Profile photo of foundationfoundation
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    @foundation
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    Quote:
    So you're saying that if you buy a property in an area that has achieved 10%+ average growth over the last 20 years you don't expect that trend to continue?

    Correct! I wouldn't be at all inclined to extrapolate the last 20 years of price change along an exponential trend-line for the next 20 years.

    In a nutshell (or nutcase, if you're referring to me), here is why. The last 20 years of house price growth have been entirely dependent on a particular trend in household debt. Specifically, the trend of exponentially increasing indebtedness compared to household incomes. If this (second) trend continues, households will eventually have more debt than they can ever repay, more debt than they can pay interest charges on with their entire income. That’s not going to happen. Therefore I don’t expect this second trend to continue. Without the second trend, the first trend (house price growth) cannot continue.

    This chart perhaps explains my point more clearly:

    Chart courtesy of Steve Keen (http://debtdeflation.com/blogs/)

    Quote:
    I know what you're trying to illustrate but you're missing the point which is – if you buy well placed property that has exhibited strong growth in the past there is a likelihood that the growth will continue in the future. Correct?

    Try and pick a hole in that one Einstein!

    I'd agree up to a point. 'Strong growth' can only ever be a relative term. It might have exhibited stronger price growth than other properties in the past. This may well indicate it will continue to outperform other properties in the future. Or it may simply indicate that it is overpriced and future growth will be subdued (it is impossible to know which until after the fact). It might have performed well against shares, but then you'd be looking more at volatility and fundamentals (p/e etc) than 20 year price trends to predict the future. It might have performed well compared to gold/beer/wheat/tungsten… and perhaps you could frame an argument about likely future growth around that.

    What doesn't make sense at all is to simply look at time and price (eg prices double every ten years), without reflecting on the movement of other variables that were required to enable the price to change (such as my example of debt).

    Imagine the people who bought property in Melbourne in the late 1880s (see chart in my previous post). They might have read books by snake-oil salesmen with words such as "land prices never fall" and "land prices double every seven years". They then would have lost 50%+ of the value of their properties over a couple of years and found that 20 years later, prices had not octupled as promised, they had merely regained their original level! To add insult to injury they soon thereafter would have found the world engulfed in a war on a scale never before seen which subdued property growth again until the roaring twenties. I expect we all know how that ended though…!

    Incidentally, in both periods, the 1880s boom/1890s bust and the 1920s boom/1930s bust, bank credit rose exponentially (as per the household debt/income chart) and unsustainably against gross domestic product, then declined in almost mirror fashion. I'll try to find a chart… ah, here we go:

    RBA: TWO DEPRESSIONS, ONE BANKING COLLAPSE, 1999

    Here's the US, showing the great depression (and the debt bubble that led to it):

    And here's Sydney house prices (relative to wage see, not time):

    I've traced the actual path of private debt versus GDP onto that to illustrate my point.

    Cheers, F. [cowboy2]

    Profile photo of DobbyDobby
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    @dobby
    Join Date: 2005
    Post Count: 37

    You are making some key assumptions:

    1. People won't be able to continue along the debt path of the past – it has to come to a point where they can no longer afford the increasing debt.
    2. Because of point 1. house prices will eventually have to tumble.

    With regard to point 1. – what about if banks bring out longer term mortgages like they have in Germany/Nordic countries? In Germany/Nordic countries the mortgage periods (from memory) are around 100 years and therefore you pass your debt (and house) onto your children to repay. This lowers overall monthly repayments.

    Also with regard to point 1 – What about if rents rise by enough to cover said debt repayments. If you believe the current media hype – rents in Sydney are due to rise by 40% beteween now and 2009. Surely this would soak up a large chunk of the debt repayments?

    With regard to point 2. – I don't disagree that the housing market is a cyclical one and that house prices do stagnate (sometimes over long periods of time). What I'm saying is that (on average over the long term) good properties in sought after areas i.e. in the current market that would be those generally up to 10kms from the CBD (with a few exceptions) will double every 7-10 years.

    Basically you can use statistics in different ways to argue 2 completely different points of view.

    I'm sure if I had the time (and inclination) I could pull some figures out of my ars*e to back up my point of view. This all just harks back to the fact that the property market in most major cities is a 2 tiered market. In Sydney you have the inner-city, east and the north shore going great guns and the people in the west suffering. When you look at the Sydney market as a whole (through the eyes of statistics) you woul think we are experiencing very moderate growth over the past few months. Not so in my backyard (inner west). Two 2 bed houses down the road from me in Petersham sold for $750K and $705K the past month and a large % of properties are selling over their reserves at auction.

    Don't put too much reliance in stats as sometimes they don't paint the true picture!

    Profile photo of foundationfoundation
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    @foundation
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    Quote:
    You are making some key assumptions:

    1. People won't be able to continue along the debt path of the past – it has to come to a point where they can no longer afford the increasing debt.
    2. Because of point 1. house prices will eventually have to tumble.

    Not assumptions, propositions. Propositions based on (in the case of the first) overwhelming evidence, and (in the case of the second) logical deduction.

    Quote:
    With regard to point 1. – what about if banks bring out longer term mortgages like they have in Germany/Nordic countries? In Germany/Nordic countries the mortgage periods (from memory) are around 100 years and therefore you pass your debt (and house) onto your children to repay. This lowers overall monthly repayments.

    I think you need to check your thoughts against facts, but that aside… Such extension of mortgage terms actually does very little to improve affordability. Look at the repayments on a 30 year mortgage compared to a 40 year mortgage. Then compare the total cost of interest over the life of the loan. Then consider a hypothetical 1000 year mortgage. Why not rent? More on this below.

    Quote:
    Also with regard to point 1 – What about if rents rise by enough to cover said debt repayments. If you believe the current media hype – rents in Sydney are due to rise by 40% beteween now and 2009. Surely this would soak up a large chunk of the debt repayments?

    I thought that everybody knew that story was a beatup and has been repeatedly, thoroughly debunked. Start here for details: (http://www.abc.net.au/mediawatch/transcripts/s1857681.htm)

    Current statistics show over 50% of renters currently classified as suffering ‘housing stress’ which is defined as rent costing in excess of 30% of income. Yields can not currently even rise to the 8+% required to make property investment sustainably profitable without turfing the majority of renters onto the street (rent > income), thus lowering demand, thus lowering rents.

    Similarly with my hypothetical 1000 year mortgage, you might argue that people choosing to rent would increase demand, raise rents, raise prices and the landlord would still win because his property would be worth more. How much more though? Rents can’t continually rise by more than incomes. If rent is ultimately constrained by income there is no reason to expect the price/earnings multiple to perpetually increase. Trees don’t grow to the sky and all that.

    So rents are constrained over time by incomes. Prices are more flexible than rents. An abnormally high p/e ratio is more likely to be adjusted via the p part of the equation than the r.

    Quote:
    With regard to point 2. – I don't disagree that the housing market is a cyclical one and that house prices do stagnate (sometimes over long periods of time). What I'm saying is that (on average over the long term) good properties in sought after areas i.e. in the current market that would be those generally up to 10kms from the CBD (with a few exceptions) will double every 7-10 years.

    Once again I need to ask you relative to what? What is the basis for your assumption that:
    * House price growth is exponential?
    * Past performance (which has relied on what is ultimately an unsustainable trend in debt) is indicative of future performance?

    Do you see that when house prices are at, say 4x average earnings, they are more likely to double over the following ten years than when they are at 8.5x average earnings? Once again, this is consideration of price relativity to something other than time.

    And supposing they did rise by 10%pa over the next 10 years, what then? Prices would be 14x average income and rental yields would average 1.8% (both assuming 5% annual inflation and that rent doesn’t take more than 30% of 50% or renters income). Would your expectation of future growth rate be diminished?

    Another 10 years and prices would be 22x average income and rental yields would be 1.2%.

    At what point does it become silly to expect prices to double just because… time passes by?

    Profile photo of foundationfoundation
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    @foundation
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    Incidentally, my hypothetical 1000 year mortgage is functionally identical to an interest-only loan. I think from now on I will try to refer to IOs as "1000 year mortgages".

    Profile photo of DobbyDobby
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    @dobby
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    I am beginning to be swayed by your arguments.

    I guess it all points to the need to have a balanced portfolio of housing investments i.e. some high growth properties balanced with cashflow positive ones.

    You argue a good case. I guess my only reservation is that this "housing crash" has been on the cards since 2003 in Australia and since around 2005 in the US yet hasn't happened yet. Maybe this is because we don't want to believe it or simply that interest rates haven't reached the right level yet?

    Profile photo of foundationfoundation
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    @foundation
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    "I am beginning to be swayed by your arguments."

    Don't be! Follow your own mind.

    Anybody who'd listened to my argument 2 or 3 years ago would have missed out on a massive windfall if they'd planned to buy in Perth or various mining towns. If they'd planned to buy in W Sydney or regional Victoria they might have saved themselves a lot of pain already (yet the situation is now even more critical than before).

    Follow your own mind, but be mindful not to blinker it by filtering out evidence or argument that doesn't conform to existing beliefs. Take it all in, then spit out the pips. I'd suggest to many propertyinvesting forum members 'it' should include books on finance and economics that don't contain 5/7/10 steps/ecrets/lessons on anything. And of course, any advice that includes predictions of house prices doubling every seven to ten years in perpetuity without qualification is a pip. Pfftooey!

    F. [cowboy2]

    Profile photo of jefftheunitjefftheunit
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    @jefftheunit
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    A litte something i was reading yesterday

    House prices have again begun to rise after a "correction" hardly worthy of the name, except, perhaps, in the outer suburbs of the former boomtown, Sydney. Household credit and household debt are growing far too strongly for comfort.

    Taking a longer view, house prices have soared, share prices have rocketed, resource company shares have glowed in the dark, but consumer prices are subdued. The graph shows the extent of the dislocation between asset inflation and consumer inflation in Australian markets.

    Take a moment to reflect on the magnitudes involved. Each price index is set at a value of 100 in June quarter 1986. By March 2007, consumer prices have slightly more than doubled, implying annual goods and services inflation of 3.8%. Over the same 21 years, average Australian house prices have risen by 450%, the share price index has risen by a similar 480% while shares in BHP Billiton have soared by a massive 1150%.

    While the outperformance of BHP Billiton shares may in part, perhaps large part, ascribed to the "China boom", other asset prices have risen by an order of magnitude faster than prices of goods and services.

    This is a common theme around the world. China share prices have been rising almost vertically. In the mighty USA, analysts worry about the next share-price correction and the current house-price correction, and in other nations strong asset inflation co-exists with subdued consumer goods and services inflation.

    Extreme asset inflation with subdued consumer inflation is a global phenomenon. Is it also a global problem? This is a big question for modern central banks, and we encourage independent directors to ask RBA governor Glenn Stevens and his team for their answer at today's meeting of the board.

    thought it had some relevance to foundations good arguments

    Profile photo of foundationfoundation
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    @foundation
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    Thanks for the article Jefftheunit. I found the full thing here:
    http://www.theaustralian.news.com.au/story/0,20867,21848653-643,00.html

    Profile photo of jefftheunitjefftheunit
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    @jefftheunit
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    Ha, i just read it in my daily crikey email, didnt realise he published in the australian as well

    Profile photo of devo76devo76
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    @devo76
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    OK Foundation.
    I am really starting to think more about your opinions and have a question for you. The million dollar question.
    When do you think things will turn for the worst.I have a five year plan to have my PPOR paid of and own half of my IP( Thus reducing my current debt from $500,000 to $150,000). This impending bust may throw a spanner in the works. I know there is no way of knowing but im guessing you are the kind of person who would have a very good idea of when this would happen and a exit stratagy for any of your investments that would be affected.Wanna share some info

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