Interest Rates:
Everyone has an opinion about this but I don't think it’s worth the airspace. Fixed or variable is a preoccupation with people taking out a first loan. Statistically it is very rare that a punter has been better off taking out a fixed rate loan over a variable. The banks usually get it right. The fact that we have low fixed rates right now is probably a good indication that rates will be going down not up. Fixing the rate is usually not the best choice for people wanting to lower their rate but is the right choice for people wanting to gain certainty and security of expenditure around the interest payments. Its also a good choice for people who have a large property portfolio and are highly geared so if the rates shoot up they don’ have to sell in a falling market. Sometimes it is beneficial to split a line of credit with some fixed and some variable. Speak to your bank or broker.
The bogie man of interest rates hitting 18% again is very unlikely. If it did it would be for such a short time, as any government would be quickly shuffled out of office if it maintained any rate over 10% for very long.
Gearing:
High interest rates are a scare for anyone highly geared. This paragraph is not relevant for new owner occupants, just paying off their first mortgage. But if you have had your property for a while or an investment property, a good exercise is to calculate your debt to equity ratio. I am often surprised by the number of people who have not done this. Put your assets in one column - property and shares - and then your debt in another column. There is a lot of pressure out there to gear up equity and to burrow to the hilt. I don't think that is appropriate for people who can't handle pressure. You need to ascertain where on the risk ladder you feel comfortable. But if you have a debt to equity ratio lower than 50% then you could probably look at more investment. As long as you are confident that your investment is going to out perform the 7 - 8% you pay in interest you are in safe territory.
Lo Doc loans:
The debt level in Australia is at an all time high. The Aussie public have taken to lo doc loans like an alcoholic in a brewery. The introduction of Lo Doc loans (low documentation) came in for a number of reasons. One was to help self-employed people with hard to quantify, or fluctuating, income. With an ABN they were able to declare their stated income in order to gain finance. Another reason was that non-bank lenders noticed the statistic that those loans with a higher deposit, 20% or more, had a better credit history than those with a low deposit. Therefore why not make it easier for those who have capital to burrow as they have a higher commitment to that debt. I think that has proved to be correct in the long term and people in general are not prepared to risk an asset by over burrowing.
Outlook for 2007:
As adverse as I am in praising this present government, I think that they have done a good job in pulling the right levers for a soft landing out of the recent property boom. Prices have come back a bit but are stable now and I think this year will be the last year of a buyers market. I do not believe that too many investors have sold up investment properties in order to move capital into the tax-free superannuation scheme, which finishes this June. It may have kept some investors out of the property market but they will probably move back in after that window closes. I also think that interest rates will be stable or go down long term. Rental demand is up and auction clearance rates are still at a low 55% but on the rise.
