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DTI: What's the impact to us who borrowed more than 4.5 times annual income?

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  • DTI: What's the impact to us who borrowed more than 4.5 times annual income?

    I am guessing with fear:

    1. As we could no longer get new approval, we won't be able to refinance to another bank; and following this line:
    2. We will have to stay with the current lander with whatever bad rate they offer us;
    3. So the banks will charge us hyper rates (6%+???) without cashbacks to refix;
    4. So we can't afford because all our properties get the same issue;
    5. So we have to sell our properties at hand down to the 4.5 level to be treated equal;
    6. So we will be competing with others to sell with bloody low prices;
    7. So..............................?

    A terrible image. Anybody can say something to make me feel better?

  • #2
    Originally posted by JCL View Post
    I am guessing with fear:

    1. As we could no longer get new approval, we won't be able to refinance to another bank; and following this line:
    2. We will have to stay with the current lander with whatever bad rate they offer us;
    3. So the banks will charge us hyper rates (6%+???) without cashbacks to refix;
    4. So we can't afford because all our properties get the same issue;
    5. So we have to sell our properties at hand down to the 4.5 level to be treated equal;
    6. So we will be competing with others to sell with bloody low prices;
    7. So..............................?

    A terrible image. Anybody can say something to make me feel better?

    even if 1 - 3 do happen a higher interest rate will add some cost to you but i'm sure nothing that will drive you do 6...

    How leveraged are you that 4 - a few points higher interest rate will mean you can't afford to hold.

    I will add 7 for you:
    7. Always buy properties that make financial sense in an up/down or sideways market - don't leverage yourself to a point where you're forced to sell and you'll survive whatever twists and turns come in the road ahead.

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    • #3
      OK lets say 6% is all right. But what about 8%? That case I do need to think about selling. Anyway if the market is generally 8% then rent will also be high. But if the 8% is for me only and everyone else is below 6% then rent won't increase as fast. So......

      Comment


      • #4
        To make financial sense with DTI 4.5, you'd need a property with gross yield above 20%. That's not gonna happen.
        Also I don't think RBNZ will be brave enough to be the first Central Bank to apply DTI to investors.

        Comment


        • #5
          With Brexit - and the unknown fallout - hopefully that will distract the RBNZ etc for the time being aye.

          cheers,

          donna
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          • #6
            Originally posted by JCL View Post
            OK lets say 6% is all right. But what about 8%? That case I do need to think about selling. Anyway if the market is generally 8% then rent will also be high. But if the 8% is for me only and everyone else is below 6% then rent won't increase as fast. So......

            If if you can't afford to keep the property with mortgage rates at 8% - then you are way over leveraged to begin with.

            also, suggesting banks will go this high just because They know you are under 4.5 DTI ratio is unrealistic, as they know they will lose your business to a multitude of other lenders who will be able to offer cheaper rates and who aren't bound by reserve bank rules.

            Comment


            • #7
              Originally posted by Kbkiwi View Post
              If if you can't afford to keep the property with mortgage rates at 8% - then you are way over leveraged to begin with.

              also, suggesting banks will go this high just because They know you are under 4.5 DTI ratio is unrealistic, as they know they will lose your business to a multitude of other lenders who will be able to offer cheaper rates and who aren't bound by reserve bank rules.
              On the first point - totally agree with the sentiment, but not quite the phrasing.

              In our current interest rate environment it is totally acceptable to leverage to the hilt on 5% mid-term-future interest expectations, so that if rates suddenly jumped to 8% you'd be in trouble. This is acceptable, that is, so long as you have good risk-minimising mortgage strategy (so rates can't suddenly jump) and a solid debt repayment plan so that when your rates go up to 8% or even higher - which they will eventually - your principal is lower and you can absorb the hit.

              And the second point is a great one - there'll always be non-bank lenders to step in if the big banks truly start to play nasty. Not that I see that happening.
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              • #8
                Mmmmm, I have to admit that we borrowed a bit too much.... But all fixed between 4.29-4.45% for 3 years time. My assumptions were that our income and rent will increase during the period and we'll be able to absorb up to 7%, and that interest rates won't go up that much within 3 years. Maybe I took a bit too much risk, but look, if you invest in Auckland what else can you do? Ours' have net yields around 4% and that's the best we could find (we typically don't want to be involved in trouble with bad tenants so we only invest in North Shore and we have absolute no worries with tenants and even no vacancies). I guess one does need to take some risk to get good returns. And one Auckland unit/TH/apartment costs 4-5 houses in Invercargo, so one can not borrow less to make it work. There is just no such thing for $200k to buy.

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                • #9
                  The DTI is not going to happen.

                  Most people buying in Auckland now are borrowing more than 4.5 times their incomes anyways.

                  If DTI goes live at 4.5x:
                  1) Sales volume will tank. Barfoot agents marching down Queen St because they will all be out of a job that can't get paid, followed by Raywhite, Harcourts etc, all the way to the WINZ office
                  2) Since lending volume will tank, ANZ staff will also march down Queen St on the same or following days, followed by Westpac/BNZ/Kiwi bank staffs. Banks are managed by accountants, so they will happily fire/lay off tens of thousands of bank staff surplus to requirements. They will also be on their way to the WINZ office
                  3) New builds will not sell. Builders/tradies will march down Queen St too perhaps, or to their accountants office to close off their trading companies to get rid of any liability/debt from their customers.
                  4) Big four will be busy with all the liquidation requests
                  5) Lawyers will be busy defending their clients from banks/debtors challenging family trusts

                  Pop corn time anyone?

                  Comment


                  • #10
                    Would we see investors looking at cheaper, high-yielding properties in the provinces rather than expensive capital gain properties in Auckland?
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                    Comment


                    • #11
                      High yielding.... Let's say Inver. You buy a 3bed for $160k and rent it out for $270. Then you pay $26 management fee and $40 for rate and insurance. Assume no vacancy and no maintenance and no accountant. You get $44 per week. For ten years you get $22,880.00, 14.3% of house price, not discounted. CG for Invercargill? Maybe 20%.

                      What's the point, you tell me?

                      Don't take me wrong, I do buy provinces. But not the high yield, no.

                      Comment


                      • #12
                        Originally posted by sidinz View Post
                        Would we see investors looking at cheaper, high-yielding properties in the provinces rather than expensive capital gain properties in Auckland?
                        Good question - that will come down to what the rule makers decide to include as 'income' - if rental income is included the i would imagine yield properties will become more desirable...driving capital gain in these properties until an equilibrium is hit - much the way yield stocks have increased in value over the past few years as cash deposit rates dropped - investors seeking a better return on their cash.

                        If income multiples do come in and rental income is considered income, in theory someone with higher than 4.5x income could get to below the multiple requirement by purchasing high yield properties. Depending on current level of income multiple those stretched will require higher yield and/or many multiples of their current portfolio value to get the balance back to below multiple limit.

                        There is a possibility that this portfolio could be come HIGHER RISK than having a high multiple of income Auckland based portfolio with what the rule makers deem an unacceptable level of debt to income.

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                        • #13
                          I think Brexit will distract everybody for the next 2 years, keep calm and keep investing.

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