Fixing Long Term Loans- Less stress but more costs

[House Hunter]

My partner and I you could say have overleaveraged ourselves.

We are 29 and 31 and she is due to give birth in 6 months time and be a stay at home mother.

We have 1.2 million over two rental properties with debts of 820k and rent a third seperate property ourselves. Our rentals combined at 5% interest rates are break even/negative 1-2k per year.

Retrospectively we didn’t really know what we were doing when purchasing these but are wanting to keep hold of them long term through the next decade or so of living on one income, raising children, etc. Once again, not investing on the numbers as logic would say sell and find higher yielding properties. However, with the baby on the way and us settling into a new city in a months time, selling a property and going around open homes in Rotorua say is not high on our priority list.

I feel we have two options when our 4x fixed of give or take 200k each loans come up for renewal periodically over the next 24 months.

A- we continue to pick the best shorter term 1-2 year rates at 5% and hope when they come up again the interest rates haven’t jumped up to 7% or higher.

B- we fix for 4-5 years at 6% and know that the properties will be 8k negative a year but know that an increase to 7% plus interest rates is further in the future and inflation in salary, rental income, etc theoretically would have increased to offset this.

Not an ideal scenario we have set ourselves up in but would love to hear your thoughts.

Our goal by 40 (10 years away) is to purchase our own home over and above these two rentals.

[JBM]

>>>>>>>>>>>>&g t;>>>>>>>>>>>> >

Well not a position I'd want to be in personally, I hope for your sake the US FED doesn't increase core rates 3+ times this year like they have been posturing about of late ... if so I can't see our central bank not going with the flow and hiking even though they seem to think we won't.

Also historically we have had very strong capital growth over the last few decades of easy money policy this may well change to very flat to low Capital growth over the next decade as household debt Vs incomes forces much tighter lending practices along with new Govt anti foriegn speculation taking away some buying pressures

Also, interest rates can be forced upwards and not see major inflation in incomes unlike we did during the 2000's ... the utter madness in property Capital growth over the last few years locally where sections have doubled in value yet incomes haven't grown all that much doesn't match the prevoius decades inflation across the board and raise in rates to combat ... this time we have very cheap debt 4-5% Vs 8-9% of the last market top >>

“If the past, by bringing surprises, did not resemble the past previous to it (what I call the past's past), then why should our future resemble our current past?”
― Nassim Nicholas Taleb, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets

[GLin]

I personally would work with a mortgage broker to:
1) fix your loans every 12 months at 4.15-4.35%. Longer term rates are rip off, banks don't do charity they always win.
2) apply/extend maximum interest only period for both loans
3) apply maximum revolving credit
4) have a portion like 50k of your mortgage in the revolving credit, so if you have any savings, pay that off first.
5) do all the above before birth.
6) if current bank doesn't comply, refinance to another bank with your broker

[GLin]

As for you the bread winner, look at the job you got now, how secure is it? How is your company doing? Any chance of jumping to a more secure and better paying job?

[GLin]

Oh dear your LVR is 68%... well start budgeting... you won't have luxury of refinance or top up or extend interest only periods etc...

if you you can't afford to hold, sell one of them...

[Nick G]

Hedge, some at 1 yr, some at 3, 50K on revolving credit offset. Talk to a broker now about breaking costs to get it all set up before rates (supposedly if you believe the news) go up. Many banks will pay a cash-back, including your current bank, in order to win your business. A good broker will help you. Feel free to PM me if you'd like an intro to mine.

I'd be stress-testing your loans at 1-2% higher than they are now and if it isn't pretty then it's time to sock away more savings (revolving credit up to 100K) to cover your future risk.

Cheers

[ripeka]

My partner and I you could say have overleaveraged ourselves.

B- we fix for 4-5 years at 6% and know that the properties will be 8k negative a year but know that an increase to 7% plus interest rates is further in the future and inflation in salary, rental income, etc theoretically would have increased to offset this.

If you use Option B, you are locking in a LOSS of $40k over the five year period. The only reason you would do this is if you are really sure of continued capital gains (which seems unlikely over next five years) and have solid income to service the loss. So basically gambling which seems exceptionally risky given that (as you have acknowledged) you are overleaveraged.

Also by locking in that long, you potentially use flexibility to sell one property if you get into trouble and not pay bank fees (which can be expensive depending on what interest rates are doing and whether the bank will let you out without penalty).

If you can restructure as per the suggestions above, then that’s great. Otherwise, I would sell one of the properties. Having a baby and the life change that goes with it can be stressful. Don’t need significant financial stress as well!

[Wayne]

I would use B also.
You need to lock in now (or soon) what you know you can afford not hope that you will be able to afford it later (with short fixes).
Maybe keep some at a short rate incase you come into some money.
Being long term fixed may help you sleep at night if rates rise later.

[Viking]

Get your rents up $20 a week. That's a thousand a year. x twice.

[Viking]

Oh dear your LVR is 68%... well start budgeting... you won't have luxury of refinance or top up or extend interest only periods etc...

if you you can't afford to hold, sell one of them...

Who said?
Get the rents up $20 a week each.
Wait a few weeks and fix 3 years at just over 4%. Interest only.
The banks are back in play.
ASB tonight 4.3% 1 year but more to come.
3 year will get to 4.
68% means they can offset some one else's 85%.
The RBNZ are going to crumble shortly anyway because the Govt. are in the crap over housing. It's all about to bite them in the bum.

97000 more Kiwi's last year and 4 million Tourists this year and adding another 95000 this year to our population. Shortage of housing is going to hurt.

don't ya just luv it?

Flakey Phil can't make it happen. Especially without the banks help.