The rise and fall in house prices and interest rates is a cycle...

The rise and fall in house prices and interest rates is a cycle that comes and goes and has done for as long as I can remember. The only difference this time around is the RC which is fuelling negative sentiment towards the entire sector.

 

Unless the housing market ceases to exist, there will always be borrowers needing to borrow to fund the purchase of property either to live in or as an investment. Those investors (and it is only investors) on Interest Only loans will have always been aware that there loans will revert to P&I at some point. Interest Only loans are generally only approved up to 5 years before the bank expects the borrower to start reducing the loan. In my experience, the great majority of investors who purchase investment properties on an IO basis only do so with the intention of offloading the property after the 5 year IO period, so these investors are only short term investors. They obtain the maximum tax benefit during the time and aim for a nice little capital gain once they sell.

 

For all borrowers a margin is ALWAYS added to the interest rate when assessing a customer’s ability to service a loan. There will no doubt be some that will not be able to afford an interest rate rise – these people will sell and a new buyer (perhaps borrower) will replace them.

 

In terms of house prices falling, this could potentially affect both home owners and investors alike, but most likely the people who have borrowed greater than 80% LVR. Remember, not everyone is borrowing >80%LVR.

 

If I bought a house for $1m; borrowed 65% ($650K); house is re-valued at $900k (10% fall); Even if I had not reduced the principal $650K, the new LVR would only be 72%. The banks not going to change my repayments (unless interest rates go up) based on the revised valuation and no one has to sell. The effect is zero.

 

The banks will first need to re-value those properties (as they do regularly through the course of the loan) to determine if they are over-exposed and need the borrower to cough up some cash to reduce the LVR. The banks will give those affected the opportunity to reduce the principal amount and if not they may need to sell the property. It won’t be pay an extra $20k into your loan today or we will sell it tomorrow. If it’s sold (to potentially a new borrower), the bank gets their money back and the cycle continues.

 

Rising and falling house prices and interest rates is nothing new.