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Australian Property Podcast


Jun 20, 2022

So in today's episode I'm going to discuss a bit of an interest rate update we're going to talk a bit about variable verse fixed and also how p i repayments are affected relative to interest only repayments as a result of the recent rate rises so please subscribe like and share would greatly appreciate it and please note as always everything discussed here is done so for entertainment purposes only i've not taken into account your personal circumstances nor your risk profile so you should seek professional advice before making any investment decisions so today we're going to dive in a little bit further around fixed verse variable rates currently and a little bit around how the actual interest rate changes are affecting people's actual monthly repayments so um basically we've got our little disclaimer here so first i'm going to talk a bit about the spread between fixed and variable that we're seeing at the moment so there has become a big divide in between fixed and variable rates basically now what i'm seeing is the trend of people moving toward variable rates going back a couple of years um you know there was a lot of uh talk about you know people wanting to fix at the lower rates where they were lower than variable um what we're starting to see is that um the majority of people now are opting for variable and i believe that's on the back of you know variable being much cheaper than fixed across the board pretty much at the moment um the concern that i've got is that you know in past years when we had fixed rates lower than variable that you know preempted um you know the down move in rates uh that we saw on variable rates after um and so you know the concerns that i have are that we could see a potential repeat of that where you know the fixed rates are trending upward and maybe the variable rates will follow them over the coming years now there is also the inversion of the yield curve in the us which is where short-term rates in some cases are now longer than long-term bond interest rates this is sort of changing day by day the thing to look at there is the two and ten year yield and basically where you have a situation where short-term rates are paying a higher interest rate than long-term rates this is normally um an indicator of an upcoming recession um and that's because you know people are uh more willing to take the lower rate and more secure rate over the long term uh so yet basically expectation of of rate cuts basically now that is something that's quite fluid but just something to keep note of there um now basically looking at sort of the spreads between it you know these are changing on a weekly basis at the moment but there's generally a difference of one and a half to two and a half percent between the two year fixed rate which is typically the higher versus variable rates at this point in time so the spread between the two is um quite wide at the moment you know in some cases the two-year fixed rate is is virtually double um the variable rate and just a couple of months ago we saw that you know rates were at a very similar level and in some cases you know fixed were still lower or you know they were actually you know virtually identical between the variable and the two year fixed rate um and so i do have some concerns you know around the sustainability of the market you know if they are raising rates materially because it not only affects the cost of lending when you are a mortgage holder but also consumer costs are skyrocketing at the moment you know we're seeing um higher food prices um you know petrol everything like that and so you know jumping up the cost of people's mortgages uh more or less just compounds that problem even further now if we look at principal and interest versus interest only repayments um basically with this um i saw an interesting chat uh in the broker group basically where they were talking about that actually the rate rise differs depending on whether you're on p i or whether you are on interest only and so for example um your rate repayment actually will increase more if you're on io so for example if you're on p is a principal and interest one million dollar loan and let's say you're on a three percent rate right now versus um you know a one million dollar interest only rate again starting on three percent let's say both of those go up by half a percent and so um even though both of them are going up by half percent both of them are the same loan size and the same starting interest rate um the actual repayment increase is not the same uh despite the interest increasing by the same amount because you know one million loan three percent going to three and a half so they're both increasing by a half percent however when it comes to actual repayments so the p i repayment will go from four to one seven a month to four four nine one so 274 a month more versus interest only will actually go from 2500 to 2917 so it's actually 417 dollars higher which is actually substantially higher and i'll just move this to the side so you can see here so basically um 274 versus 417. so whether you're on i or whether you're on p i is actually going to significantly affect how much additionally you're paying so the short thing here is that investors who are the ones that are typically sitting on interest only are typically going to be you know hurt a lot more um than people who are on p i typically just for for their standard home now looking forward um you know trying to pick the direction here is obviously very difficult um you know the old saying is if i knew the answer to that i'd be drinking pina coladas on the beach but um it's clear that you know you need to be in a position of having a bit of liquidity on hand so that you can ride out any potential upcoming storms now we can't be sure how long rates will rise for and for how long but you know it can be potentially devastating if repayments were to say double or you know if they take the cash rate to two two and a half three percent over the next couple of years uh it's going to be an enormous uh increase in repayments for people and i think that that could be um you know very devastating for people uh in terms of you know what their cash flow looks like and then that flows through to businesses and everything like that and you know as there's less demand in business then um you know that's not good for jobs and then again the cycle of recession sort of moves forward and it's important to know that you know while we still have competitive variable rates out there at the moment so a lot of stuff still on the toes um you know the trajectory it's sort of very challenging you know in the us i'm seeing talk of new mortgage rates i think it's actually over six percent i saw now and um and new zealand in the five percent ballpark as well so you know these are other countries that have historically been quite low on interest rates in prior years and uh looks like they're you know trending upward now as well in addition to mortgage repayments increasing rents are also rising in a lot of situations so um this does somewhat offset interest rate costs uh you know this is good as a landlord but obviously terrible if you are renting and saving to buy um and you know this is something that should be considered also uh that you know i saw a media headline recently about choosing your badge so you know do you want to pay a high amount of rent or would you rather pay a big mortgage with an increasing rate so um sort of neither good options but um you know those are i guess the options that are available uh trajectory of the market wanted to just briefly touch on this so um you know we have seen recent data showing sydney and melbourne in particular starting to decrease and it's important to note that you know sentiment is highly important when it comes to asset pricing um consumer confidence and the fear of missing out are real things when it comes to pricing assets i think you need to be very careful of the market softening especially if you have a short-term time horizon if you do have a long-term time horizon and you know ideally you should be in a strong cash flow position as well to service the debt so that way even if rates do increase a lot um you know you'll be in a position to be able to hold and you should aim to build up some liquidity to keep you safe in case things do get extreme because we don't know how high rates can go here and personally i've already started to decrease my discretionary spending and so you know if other people follow suit then you know we will potentially see the economy flow through and potentially deteriorate um you know with the lower rate of spending being done uh the wealth effect which is the concept of people spending you know as they become wealthier you know that is the real thing and so if people see their asset prices um you know very much trending down then that may you know cause them to reduce their discretionary spending now i still believe australia is an attractive jurisdiction you know i believe we are going to see future migration i know there has been some people leaving the country recently but um i do believe you know future migration is you know a real thing um and i believe that you know australia is sort of recognized globally as a fairly stable democracy you know with good weather and so i think over the years you know we are going to see more and more people migrating here and you know so many construction companies are also going under as well so you know that presumably will eventually have some impact on the speed of new supply coming to market and that could be supportive of existing stock as well another thing to note new south wales is also looking to drop stamp duties so it looks like dominic perrault is uh pushing basically to you know polish stamp duty in favor of the annual land tax option i think this is very good news for buyers it significantly reduces the deposit requirements um and previously i thought that this would cause a bit of a jump in prices sentiment is quite weak at the moment so wouldn't quite bet on that at the moment but i think it is going to be supportive of the market and i think that you know it is um a good sort of catalyst here as well um and you know we do have a couple other factors you know we've got like the shared equity scheme and a couple other things coming up so uh you know it's not i guess all doom and gloom i'll be doing further updates on how the market is changing over the coming weeks if you've enjoyed the video please do subscribe like and share and please notice always everything discussed here is done so for entertainment purposes only i've not taken into account your personal circumstances nor your risk profile so you should seek professional advice before making any investment decisions thanks so much for tuning in