Who's in debt and by how much?

[ChrisFooty]

I would imagine the baby boomers who borrowed money to buy 4-5 houses might be in trouble next year.

Then there are some people who borrow money from the bank to put into shares. See Storm Financial and their current financial woes. They actually encouraged mums and dads to borrow money to invest. I find that amazing, as it's a terrific plan if you can guarantee that shares will always go up. Life is not that easy. I wish it was.

Would anyone own up? Not Likely. However there will be a few cases of this in 2009, unless Kevin Rudd produces a miracle.

 

[Chops_a_must]

I would imagine the baby boomers who borrowed money to buy 4-5 houses might be in trouble next year.

Then there are some people who borrow money from the bank to put into shares. See Storm Financial and their current financial woes. They actually encouraged mums and dads to borrow money to invest. I find that amazing, as it's a terrific plan if you can guarantee that shares will always go up. Life is not that easy. I wish it was.

Would anyone own up? Not Likely. However there will be a few cases of this in 2009, unless Kevin Rudd produces a miracle.

Nothing at all wrong with margin loans, so long as your risk management is sound.

That's where Storm went massively wrong. Margin absolutely everything possible, and stay in when things go against you.

 

[Chops_a_must]

Oh... and they double geared against houses as well which is a monumental no no.

 

[Croat tiger]

That's spot on.

Anyone who pays interest at credit card rates is a fool.

I choose to use a debit credit card now,I only pay 6 dollars a month account fees and obviously control the spending by just limiting how much I top it up with.The best part no interest rates.

 

[Niximus]

I choose to use a debit credit card now,I only pay 6 dollars a month account fees and obviously control the spending by just limiting how much I top it up with.The best part no interest rates.

Similar here, I have never had a 'credit' card but I do have a debit Visa. I get all the convenience of a visa and can use it in every way that you can with the credit versions only it draws on money I already have in the bank and I don't pay interest.

If you're not living pay-to-pay then you don't need credit for small things.

 

[fairdinkum]

Just curious how old people here were when they got their first credit card?

18.

 

[Frodo]

can't recall.

what year were they introduced?

 

[Dan26]

I have paid off my house, but I owe just under 400K (combined) on two investment properties.

But that's cool, becasue I get rent from them, and I can claim on the interest and get a nice, healthy tax return each year. I don't plan on selling them for at least another 10 years.... until house prices start to swing up again.

 

[Chops_a_must]

I have paid off my house, but I owe just under 400K (combined) on two investment properties.

But that's cool, becasue I get rent from them, and I can claim on the interest and get a nice, healthy tax return each year. I don't plan on selling them for at least another 10 years.... until house prices start to swing up again.

If you aren't able to positively gear two properties with 200k owing on each, they are seriously piss poor investments.

 

[Dan26]

If you aren't able to positively gear two properties with 200k owing on each, they are seriously piss poor investments.

How could you not be aware that the amount owing on each is totally irrelevant to being positively geared? This is because the rent one gets is directly proportional to the value of the house. A 200K house for instance should get 200 bucks a week rent (give or take) a 350K house should get about 350 bucks a week (give or take.)

They can only be positively geared if the rent exceeds the interest payments. Which it doesn't. Yet. The rents are proportional to what the houses are worth (as it should be). That's the whole point of getting an investment property, to eventually make it positively geared, which doesn't always happen initially, given the loan is at it's highest point at the beginning of aquiring the investment (with both being relatively new investments.) What do you want me to do? Overcharge the rent by several hundred dollars? lol

The capital growth over the next 10 years or so, combined with the low interest rates, will ensure that point will be reached. But you act as though negative gearing in any form is bad. It isn't. It allows people who wouldn't normally be able to buy an investment a way of doing so. In America, for instance, you can't claim on interest payments for investment properties like you can here in Oz, so a lot of people wouldn't be able to get into the property investing game.

Getting involed in investment properties was the best thing I did. The house I am living in now, was rented out for a while too, when I still lived at home.

I have no intention of selling either property by the way. I will just sit on them, take the rent, pay them off, and perhaps sell them in 10-15 years.

 

[sniper77]

Current debt is $322k, against assets in excess of $1m

Original loan amount was $375k, 2 years ago which equates to over $50k of P&I paid off. Repayments work out to 15% of total income.

All earnings are paid into ING Mortgage Simplifier account (redraw loan account - no fees). All purchases and expenses charged to credit card which is cleared monthly.

System works well, as long as you clear the card monthly.

 

[Eagle87]

How could you not be aware that the amount owing on each is totally irrelevant to being positively geared? This is because the rent one gets is directly proportional to the value of the house. A 200K house for instance should get 200 bucks a week rent (give or take) a 350K house should get about 350 bucks a week (give or take.)

They can only be positively geared if the rent exceeds the interest payments. Which it doesn't. Yet. The rents are proportional to what the houses are worth (as it should be). That's the whole point of getting an investment property, to eventually make it positively geared, which doesn't always happen initially, given the loan is at it's highest point at the beginning of aquiring the investment (with both being relatively new investments.) What do you want me to do? Overcharge the rent by several hundred dollars? lol

The capital growth over the next 10 years or so, combined with the low interest rates, will ensure that point will be reached. But you act as though negative gearing in any form is bad. It isn't. It allows people who wouldn't normally be able to buy an investment a way of doing so. In America, for instance, you can't claim on interest payments for investment properties like you can here in Oz, so a lot of people wouldn't be able to get into the property investing game.

Getting involed in investment properties was the best thing I did. The house I am living in now, was rented out for a while too, when I still lived at home.

I have no intention of selling either property by the way. I will just sit on them, take the rent, pay them off, and perhaps sell them in 10-15 years.

So one assumes that since you apparently bought them reasonably recently (they are still negatively geared), that you are - as you say - looking forward to the capital growth over the next 10 years.... what do you reckon the growth will be from say December 2007 to December 2017 as property always goes up?

Negative gearing into property coupled with easy access to credit has no doubt turbocharged the property bubble, some of us arent sure this is a good thing....

 

[Chief]

Why anyone would a get a credit card is beyond my understanding

It is essential for doing business online.

Web servers, software, other services. My card has a small-ish limit but it gets hammered so I usually pay it off every week or two. A useful, free line of credit for expenses.

The problem comes when my cash flow is slower and it goes over the interest-free period. No biggie really, only a few bucks in interest a few times a year.

 

[Dan26]

So one assumes that since you apparently bought them reasonably recently (they are still negatively geared), that you are - as you say - looking forward to the capital growth over the next 10 years.... what do you reckon the growth will be from say December 2007 to December 2017 as property always goes up?

Negative gearing into property coupled with easy access to credit has no doubt turbocharged the property bubble, some of us arent sure this is a good thing....

Well, as a rule of thumb, you'd hope to have a property double in value over a given 10 year period. I don't think there will be any significant growth over the next couple of years, but with rental tenancy at an all time low of about 2%, landlords can charge much higher rent than what they would ordinarily be able to anyway, which helps with running costs. I've pumped up the rent the last few times the lease has expired on both properties.

I don't think it will double in 10 years necessarily, but who knows? It might take 5 years or more to see any movement in property prices, but no one really knows. It often depends on the suburb. One property is in Tasmania and it has gone up 60K in value from when I bought it in 2005. The other is in Werribee, which is a cheap suburb in Melbourne's west. But Melbourne's west will boom, because it is the only place some people can afford, so plenty of people will move out that way. Places like Melton and Werribee still have 3 bedroom houses for $200,000 yet they are the same distance from the city as suburbs such as Springvale, Mentone, Ringwood which are on the other side. If you look at a map of Melbourne, an outer western suburb like Werribee would be a middle suburb (in terms of distance to the city) if it was placed on the other side of the city.

So, I think there will be significant growth there. The West is definately the place to watch. A few years ago, people discovered Sunshine (which used to be a laughing stock) and it doubled in value. They will eventually move further out, I reckon, to search for outer suburbs which are still 30 minutes drive from the city.

 

[Sargemo369]

It is essential for doing business online.

Web servers, software, other services. My card has a small-ish limit but it gets hammered so I usually pay it off every week or two. A useful, free line of credit for expenses.

The problem comes when my cash flow is slower and it goes over the interest-free period. No biggie really, only a few bucks in interest a few times a year.

Visa-debit

 

[quickstraw]

Good post, the bit I bolded is whats gone wrong, paying down principal used to be the aim of the game, now its spending the equity in your home on holidays new cars etc, that game is finished too, back to paying down principal again, good luck spending the next 30 years paying back half a million dollar home loan.

Paying down principle = old hat
Accessing equity to finance non appreciating assets = old hat

Accessing principle to buy new assets and pay off interest = new hat
Accessing principle to use as income = new hat

I suspect you don't really understand gearing properly or good v. bad debt.

 

[quickstraw]

I would imagine the baby boomers who borrowed money to buy 4-5 houses might be in trouble next year.

How so? Interest rates are down, rent is up, property prices are irrelevent. As long as they don't lose their jobs most will be okay.

 

[quickstraw]

Similar here, I have never had a 'credit' card but I do have a debit Visa. I get all the convenience of a visa and can use it in every way that you can with the credit versions only it draws on money I already have in the bank and I don't pay interest.

If you're not living pay-to-pay then you don't need credit for small things.

You need to get yourself a credit card. Pronto.

Why? Because from what you say, you are a responsible spender. If you're as responsible as you sound then a cc would be no risk to you. You just pay it off every 4 weeks so you don't incur interest charges.

But what is the point you ask? It gives you are credit rating so when you go for a loan you will have a sound credit history.

 

[quickstraw]

If you aren't able to positively gear two properties with 200k owing on each, they are seriously piss poor investments.

Sounds like Dan is in a good position. Where are you at? I bet you're one of these naysayers who never twig that many of the country's wealthiest people make their money from gearing, and many mum and dad investors set themselves up through gearing.

 

[quickstraw]

That's the whole point of getting an investment property, to eventually make it positively geared,

You can make more money if you keep them negative.

 

[quickstraw]

So one assumes that since you apparently bought them reasonably recently (they are still negatively geared), that you are - as you say - looking forward to the capital growth over the next 10 years.... what do you reckon the growth will be from say December 2007 to December 2017 as property always goes up?

At a minimum they will double. Let's say Dan's places are worth $250k each. Every year he pays $28k interest and recieves $14k net rent leaving him a loss of about $12k pa after tax and depreciation are accounted for.

In 10 years his investment assets are worth $1m, his debt is still $400k. Given rent increases over this time his loss will depreciate every year. It will probably cost $100k to hold those places over 10 years.

Worst case scenario is that he's $500k up after 10 years. But most likely Dan will get better at investing and discover more advanced strategies such as pyramiding and increase his net worth even further.

Negative gearing into property coupled with easy access to credit has no doubt turbocharged the property bubble, some of us arent sure this is a good thing....

The only people who find it a bad thing are those who want to own their own home but find the market unaffordable whilst at the same time don't want growth, or those who don't have an in depth understanding of gearing and Australian property markets.

As long as Dan can service his loans and ride out any market glitches he's not going backwards.

 

[Scotland]

At a minimum they will double. Let's say Dan's places are worth $250k each. Every year he pays $28k interest and recieves $14k net rent leaving him a loss of about $12k pa after tax and depreciation are accounted for.

Will they now?

If every $250k property will be worth $500k in 10 years, what will happen to those that are worth $500k currently? Will they be worth $1m? Will the cheapest 1 bed apartment in Perth going for $200k today be worth $400k in 10 years time? You can't expect that people will be paying $400k at the bottom end of the market unless the bigger, more expensive places also see massive price jumps.

Property has more than doubled in many areas in a lot shorter time time frame than 10 years. To assume that 'she'll be right, it will be worth twice what I paid for it in 10 years' is pretty ambitious, IMO.

 

[quickstraw]

Will they now?

Highly likely.

If every $250k property will be worth $500k in 10 years, what will happen to those that are worth $500k currently? Will they be worth $1m? Will the cheapest 1 bed apartment in Perth going for $200k today be worth $400k in 10 years time? You can't expect that people will be paying $400k at the bottom end of the market unless the bigger, more expensive places also see massive price jumps.

You must be too young to see the pattern. See these $500k places you talk of? Go have a look at what they were selling for 10 years ago. Chances are they were going for less than $200k (I can show you some specific examples if you like).

You know what? Back then there were people like you saying "there's no way people will pay $500k for that in 10 years time. It's absurd. There's no way I'm buying.

Guess what? Those people are still talking the talk whilst people like me are walking the walk.

New 1 brm units in Sydney sell for $400k starting price. Seems absurd even now. But in 10 years they will be selling for $800k, the average wage will be $130k, and new houses in regional areas will be $700k due to building costs.

That's how it has always been and will most likely always be. I remember cans of coke at a deli were 35c. Now they're $2.50. In 10 years we'll probably be paying $4. And take in mind that assets such as shares and property always exceed inflation long term.

 

[Niximus]

You need to get yourself a credit card. Pronto.

Why? Because from what you say, you are a responsible spender. If you're as responsible as you sound then a cc would be no risk to you. You just pay it off every 4 weeks so you don't incur interest charges.

But what is the point you ask? It gives you are credit rating so when you go for a loan you will have a sound credit history.

If anything it would do the complete opposite.

I recently got a home loan without ever having a credit card.

Where I did have trouble was in connecting the electricity. I went with a smaller provider who called to let me know I had 'failed' their credit check.

I ordered a copy of my credit file which was perfect apart from having loan approvals well over half a million dollars in the last 8 months.

The trouble with the credit system is it doesn't record if you go through with approvals, it doesn't record if you make repayments on time, it only records when you are approved and when you **** up.

If I got a credit card all it would do it appear as another liability on my file.

 

[quickstraw]

The trouble with the credit system is it doesn't record if you go through with approvals, it doesn't record if you make repayments on time, it only records when you are approved and when you **** up.

If there's no black marks and you have loans approved then it is assumed you are making repayments. A history of approved loans (inc cc's) and no black marks leads to a good credit rating which you obviously have. Don't know what your electricity company were thinking.