"Home buyers are paying $600 per week on interest, rates, repairs and home ownership costs, but drawing on equity via re-financing credit cards and ancillary items over the life of the mortgage"
Oznflfan - spot on observation, and exactly what is happening in NZ atm......
Nadilo and Dudson say they are seeing clients who have been pushed into a financial corner. They've owned negatively geared rental properties for a number of years and borrow the money to make up the shortfall each month.
Over the past few years, says Nadilo, the ability to claim depreciation of chattels and buildings against tax has been removed. What was costing them $30 or $40 a week per property to top up may now be $100 per property.
They may be paying $300 a week to top up three properties. That money isn't coming out of income, but rather being added to a revolving-credit loan.
"A lot of people are operating on these revolving credit rapid repay [loans]," says Nadilo. "As a result they may not even know what the property is costing them."
In the past, says Dudson, they may have been able to go to the bank and ask for a top-up on the revolving credit when it was used up.
Suddenly they are finding that the bank has tightened up and that avenue of easy credit isn't available. That leaves them between a rock and a hard place when it comes to funding those properties.
Another problem is that many investors fall into the trap of mental accounting. The property isn't growing in value, but you're not losing any money are you? Well, actually you are. Quite a lot. If the value is moving sideways, but inflation is running at over 5 per cent, the real value of that property is dropping.
In the meantime you're topping up the mortgage by $100 a week. That's not savings. It's losses. You may be getting some of it back in tax rebates, but not all of it.
It's not completely a financial equation, adds Dudson. Sometimes the stress is too much to hold on.
She saw one client who was staring a $200,000 loss in the face if she sold her leaky rental property. The stress had forced the self-employed woman from her work, which meant she was losing $100,000 a year as a result. In her case the best thing to do was cut her losses and sell.
