Mortgage costs are at their most expensive in 30 years

Skyrocketing home prices and increases in mortgage rates have diminished first homeowners  down payment and buying power.

How much of your income should go to a mortgage payment?

Forbes suggest that you shouldn’t pay more than 25% of your monthly after tax income on mortgage payments.

According to BetaShares modelling -  42.8% of  Income is used to pay mortgages with the national house price now 6.2 times the average after-tax annual household income! 

Mortgage rates in Aus have increased from 2-3pc to 5-6pc 

Mortgage rates in USA are in 7s and in South Africa in the 10s!)

Do you think interest rates will continue to rise? 

What effect will this have on the economy? 

Is it still a good time to buy property? 

Share your thoughts in the comments below. 

How the calculation works

The model utilises median capital city house prices, the average combined after-tax income for a couple, a 10% house deposit and the average discount variable rate

When lenders determine your serviceability , they use a debt-to-income ratio .

How is this calculated?  

They add up all your debt payments and dividing it by your gross monthly income. 

Say your monthly income is $7,000, your car payment is $400, your student loans are $200, your credit card payment is $500 and your current home payment is $1,700. All that together is $2,800. So, your DTI ratio is 40% since $2,800 is 40% of $7,000.

Why you should use a good mortgage broker - such as BSI Finance 

In general, a good DTI to aim for is between 36% and 43%. Some lenders will go higher, but the lower your DTI, the more likely you are to be pre-approved for a mortgage. Different lenders have different DTI requirements, though, so compare multiple mortgage lenders to find one that works for you.

There are a number of ways to lower your DTI

• Find a less expensive house. While your lender might approve you for a loan up to a certain amount, you don’t necessarily have to buy a home for the full amount. The lower the home price, the lower your monthly payments will be. 

Maybe consider renting your dream home and buying a less expensive investment home - to get into the property market? 

• Boost your deposit . The higher your deposit , the lower your monthly payment will be. So, if you can, save up so you can secure that lower payment.

•               Improve your credit score . Get a better credit rating . Look to pay your outstanding debt, like credit cards, car loans or student loans. This could lower your DTI, and  improve your credit score. A higher credit score means you could get a lower interest rate offered by your Lenden

• Get a lower interest rate - you may be leaving money off the table by shopping around for a better bank rate!

Source:

https://www.forbes.com/advisor/mortgages/mortgage-to-income-ratio/

Mortgage costs are at their most expensive in 30 years

Skyrocketing home prices and increases in mortgage rates have diminished first homeowners  down payment and buying power.

How much of your income should go to a mortgage payment?

Forbes suggest that you shouldn’t pay more than 25% of your monthly after tax income on mortgage payments.

According to BetaShares modelling -  42.8% of  Income is used to pay mortgages with the national house price now 6.2 times the average after-tax annual household income! 

Mortgage rates in Aus have increased from 2-3pc to 5-6pc 

Mortgage rates in USA are in 7s and in South Africa in the 10s!)

Do you think interest rates will continue to rise? 

What effect will this have on the economy? 

Is it still a good time to buy property? 

Share your thoughts in the comments below. 

How the calculation works

The model utilises median capital city house prices, the average combined after-tax income for a couple, a 10% house deposit and the average discount variable rate

When lenders determine your serviceability , they use a debt-to-income ratio .

How is this calculated?  

They add up all your debt payments and dividing it by your gross monthly income. 

Say your monthly income is $7,000, your car payment is $400, your student loans are $200, your credit card payment is $500 and your current home payment is $1,700. All that together is $2,800. So, your DTI ratio is 40% since $2,800 is 40% of $7,000.

Why you should use a good mortgage broker - such as BSI Finance 

In general, a good DTI to aim for is between 36% and 43%. Some lenders will go higher, but the lower your DTI, the more likely you are to be pre-approved for a mortgage. Different lenders have different DTI requirements, though, so compare multiple mortgage lenders to find one that works for you.

There are a number of ways to lower your DTI

• Find a less expensive house. While your lender might approve you for a loan up to a certain amount, you don’t necessarily have to buy a home for the full amount. The lower the home price, the lower your monthly payments will be. 

Maybe consider renting your dream home and buying a less expensive investment home - to get into the property market? 

• Boost your deposit . The higher your deposit , the lower your monthly payment will be. So, if you can, save up so you can secure that lower payment.

•               Improve your credit score . Get a better credit rating . Look to pay your outstanding debt, like credit cards, car loans or student loans. This could lower your DTI, and  improve your credit score. A higher credit score means you could get a lower interest rate offered by your Lenden

• Get a lower interest rate - you may be leaving money off the table by shopping around for a better bank rate!

Source:

https://www.forbes.com/advisor/mortgages/mortgage-to-income-ratio/

Will property increase or decrease in the next 13 years?

The rental market in Australia  is tight -  with under 1pc  vacancy in Sydney, Melb and Canberra with Adelaide,  Perth and Hobart under 0.3pc .

As supply reduces - prices tend to rise 

Immigration over next 4 years will grow by 200,000 per annum 

What does this mean for the property market and investors in the medium to long term ?

Historically , property has doubled every 10-12 years 

In 2035 - the next 13 years - will property in Australia increase or decrease ?

Take the poll 

https://www.linkedin.com/posts/ivankayebsi_property-australia-vacancy-activity-6998555221186543616--5Vf?utm_source=share&utm_medium=member_ios

The poll is out - Property still a good investment

Investing in Residential Property as an asset class

Alan Kohler and Evan Thornley talk about the investment elephant in the room !!!!

So what does the founder of Looksmart and a tech guru , Evan Thornley , know about property?

A lot , it seems 

His company, LongView, now manages 4300 properties for individual investors and is also a national buyers’ advocate. 

Thornley  is about to disrupt this lazy giant! 

Property and Gearing 

Residential property and gearing …. A cocktail that has been given Australians exponential returns since 1926.

 Solidly built properties, preferably on a rail corridor, have been an investor’s best bet for capital growth , as major city’s rapid population growth pumped up residential properties !

Total residential housing in Australia is $10 trillion, of which about $2.1 trillion is mortgage debt and $300 billion is in new developments. That leaves $7.6 trillion in equity in existing residential property, which is three times the size of the sharemarket.

And yet the $3.4 trillion in super funds don’t currently invest as there is not a liquid market and the risk/return equation makes it worthwhile.

It is certainly a big asset class – the biggest, in fact:

Research by Shane Oliver, of AMP, shows that the total return from residential property since 1926 has been 11 per cent a year – almost identical to the 11.3 per cent p.a. return from the sharemarket, but with much less volatility, so that’s a tick.

Shares vs Property and gearing (using OPM)

Real estate earns lower rental yields (2% than company dividends 6% (after Frankish credits ), but the gap is made up with  negative gearing and capital gains.

The math

The magic formula for exponential returns - gearing and being able to afford rental repayments through net rent received and negative gearing! 

An example of how the average property owner with a mortgage has made money since 1926! 

Investor  holds an investment property for 15 years at a net 3% shortfall (after tax 2%) - after 10 years property needs to increase by 30% in 10 years to breakeven .

No gearing 

Let’s assume you purchased a property for $500k 15 years ago - and sold it for $1 million today. 

Returns :- 

After costs and negative gearing , your return would be $350k or 23k per annum (circa 5 %pa on an investment of $500k ) 

Gearing 

Let’s assume you purchased a property for $500k 15 years ago - put down $200k deposit and sold it for $1 million today. 

Returns :- 

After costs and negative gearing , your return would be $350k or 23k per annum (circa 11.5% per annum ) 

So why don’t superfunds invest in property ? 

• Rent returns are less than share returns
• Inability to Scale 
• Low gearing policy 

They need large investment vehicles, preferably with the ability to sell quickly, in large lumps, if they need to. 

Enter Evan Thornley’s property fund 

Evan Thornley puts business 101 into property

Customer Service 

The goal :- To improve the rental experience for both tenants and landlords – to “dignify tenancy”, and provide a better service for investors, including guaranteed rent, where LongView takes the risk.

Investing in “solid older dwellings on well-located land”, as Thornley puts it, in the suburbs.

1. The bank of mum and dad and the Bank of Government - shared equity 

One of the funds will be for long-term rental, and the other will invest alongside home buyers in a shared equity scheme….. much like the government is doing!!!! 

In the shared equity arrangement, the fund wouldn’t own any part of the house but would provide up to a third of the deposit and stamp duty in return for a contract to share in the capital gain when it’s sold.

“Our shared equity clients are almost all migrants and children of migrants; sole parents and the children of sole parents,” says Thornley. “That is, people without the Bank of Mum & Dad.’’

2. Invest for rent through a REIT 

The other fund will be a straightforward real estate investment trust that will create a suburban land bank of existing energy efficient  houses for rent close to stations and shops so that large aggregated sites can be used for affordable housing in future.  

The investment will be geared to rely on long term capital gains 

Thornley says the initial interest in these funds will come from family offices and high net worth individuals.

Says Alan Kohler 

Whether it’s Evan Thornley or someone else, the only way the superannuation pool can be mobilised for housing is if it can be pooled into funds that break down the super funds’ bias against it as an asset class and work as a decent investment.

Are investment properties a good investment class?

An interesting post by Christian Stephens on the demand for rental properties ! 

As student migration into Sydney increase and the allocation  of migration increase from 165k to 190k per annum  , 

Together with the difficulty and bottlenecks of the supply chain for builders  - 

It seems that  the demand for rental properties will increase !