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This is a Momentum Media production. Nerd alert! Property nerds. The home for data-driven property investors, where we uncover Australia's hot and cold markets, latest headlines and trends. Welcome back for another episode of the Property Nerds podcast.
I'm your co-host Arjun Paliwal, here with Jack Fouracre from Fouracre Financial, and we are talking interest rates today, Jack. I know it's January. We're recording here for the February episode. This will come out on the 11th of February. Now, when it comes to the gamble, interest rates, up, down, what do you reckon?
For Feb? I think it'll stay the same. Okay. Yeah. That's my gamble.
Your gamble's there. Are you going to go with what CBA said, mate? Are you going to reduce it? My CBA logo tattooed on my chest from my days and days to work there. I reckon NAB's right with their May prediction.
I reckon they'll be closer. All right. I reckon we're not cutting in Feb. There you go. I reckon we're not cutting in Feb.
And yeah, that's the gamble for me. Actually, you know what? We should replace the word gamble. Let's call it competition. Have you seen that?
I wish we disagreed, though. I know, right? It would be more drama, but have you seen that Michael Jordan documentary, The Last Dance? Yeah. And he goes, apologies to my American friends out there that are hearing my American accent.
He's like, so Michael, do you have a gambling problem? He's like, no, I don't have a gambling problem. I got a competition problem. That's what we got. We got a competition problem, whether it's UFC, whether it's us talking UFC at home.
By the way, not real bets. We're just chatting in the tables, talking about, chatting around the table at home, talking about who's going to win more fight and what interest rates are coming down when. But we both reckon there's a hold. Yeah. Does that mean we both reckon the drop's the next one after that?
I don't think so, man. I don't think so. I think May, if I was to have a good guess, I think May, April, May is a good, maybe for one there. Yeah. I reckon my guess is Feb doesn't drop, the rate check after isn't dropping.
For March? I mean, aren't they meeting up at a different cycle? I think they're meeting up at a different cycle now. Oh, really? Yeah.
I think they don't meet like monthly. I could be wrong here. See, I don't pay attention to it as much now, but when it was decreasing, it was like the whole office was like, oh, guess what day it is? Now it's just like, ah. It's like a Melbourne Cup.
Yeah, literally. Yeah, look, I reckon a stay. What I think they should do is they should cut in Feb. So if you want to know the answer, what I think they should do, they should cut in Feb, but I've just been disappointed by what their readings of the data have been so far. So I reckon it's a hold.
So, mate, talking of disappointment, how disappointing is it when it does cut and everyone thinks that they now can borrow a million dollars more, but they can't? Yeah. It's not how it works, right? Look, I'm happy when they do cut it because I know there's a lot of people that need it. Yes.
And there's people that are very, very close to moving forward or refinancing, but they're just not quite there. And for those people, it might tick them over or they might have already been in a position to do something. But because of a rate decrease, it might prompt them to take action, which is the wrong thing to do. Like, if you're being proactive about it, if you can do something now, you're going to benefit from the rate cut when it comes in. Yeah, yeah, yeah.
Because there's going to be a lot of people that see a rate cut and go, oh, now's the time. The smarter ones are doing it already, knowing that the rate cut is coming in. But yeah, it works out to be... How much does it work out to be in terms of borrowing capacity? Not as much as you think.
Like a 0. 25%, what do you reckon? Yeah, so per $500,000, you could bank on roughly $15,000 in borrowing, which is not that much. But it depends on your income as well, like your income bracket and negative gearing, if there's any applied as well. But if you look at that over a larger portfolio, it's a weird one because if you've got like $2 million of debt, right, and that decrease gives you an extra $90,000 of borrowing power, that's just a cash out, right?
That could fulfill the deposit, right? That's just all you need, man. All you need. Because generally, if you can access the deposit and that's with a major bank, then you're going to go to a non-bank or third tier for the purchase anyway, which doesn't really matter. Like the rate cuts and borrowing power, it's already there.
But to access the deposit, you don't want to really go to a third tier or non-bank to access a deposit, unless you've got some, you know, in the next 12 to 24 months, you've got some big plans with your income or you're just being really aggressive at that time, knowing that you can weather it. But generally, you want to keep majority of your debt with a major so that when you're accessing the equity, you're getting favorable rates, favorable terms, a lot less conditions, and then the purchase is done with a third tier or non-bank. So if you've got a big portfolio and you get one rate decrease, it's pretty much another deposit for a property. See, that's the thing that people don't recognize, right? Like I see many mortgage brokers out there downplay it.
They go, oh, well, one rate cut's probably 3%. I get you. You're right on a percentage basis, 3% of borrowing capacity, but it's different per portfolio. If that's 3% against a whole portfolio of assets, like that's a different story. And like you said, deposit comes out.
And we're forgetting that there's also going to be people with trust lending that now might be close to neutral and they can now get there. And if they get there, that's their accountant writing them a letter that they're now comfortable with. We also have people where once they get their deposit, like you said, you go to a smaller bank and you can unlock that next purchase. Another one, and this is one you also said, what about when people are sitting with many of those smaller banks and they just needed that one or two cuts to completely refinance their portfolio back to the bigger banks, save a half a percent to a percent on interest rates on all their lending, and then pull out deposits down the track to go back to smaller banks for more acquisitions. Like people underestimate the game changer it makes, which is why you shouldn't sit on the sidelines.
You should get your portfolio reviewed because that's going to make a big difference, right? Now, when it comes to interest rates declining, Jack, what are your thoughts on when people go, well, I'm going to wait till it declines the whole percent so I can have maybe a lot more in borrowing capacity. How do you explain to them the situation that they may go into versus where they're at now with some fine tuning today? Yeah, like I said, the people that are just hearing the talk about interest rates going down, they're the smart ones. They're making the moves right now.
The ones that are going to wait for the first decrease, they're already missing the boat, kind of, right? If you wait a full year, right, all the crazies have jumped back in or all the ones that are just waiting for that sentiment to come back, they're already in. And a lot of people, we know this, a lot of people don't even know what they're sitting on. So people might be waiting for interest rates to come down, but right now they're in a position to do a lot and they're still going to benefit from the rate cut in the next month or the next six months. So yeah, like if you want to sit on the sidelines and do nothing, it's not the right way to do it.
Are you noticing some banks change things in anticipation for interest rates declining? Like example, whether it's their fixed rates, variable rates, whether it's their assessment rates, what are you seeing there? So not the assessment rate, mainly in the fixed rate. So banks are begging you to fix your rates for five years. I wonder why.
And I think back to 2020 when the rates went down to 2% and people were on a five, they were two years into their five-year fixed rate on four and a half, 5%. And they're just like, what do I do, right? There's going to be a whole wave of people that hit that same trap in the next, you know, well, already, but in the next six months where they think, oh, wait, they're going to offer 4. 2%, five-year fixed. Oh, wow.
Like, let me jump on that. And then it comes down to three, four, depending on the market. Well, yeah, you never know, but just don't fall into that trap. Like there's some specific cases where you would go fixed and it's generally on like a really high LVR loans. And you like, so for example, if you had like a high LVR loan for an investment property and the variable rate was like 7.
7 or 7. 9 or something like that. And then the fixed, they're offering 6. 8 for one year, fixed for one year. Of that a broker is able to provide versus a bank is worlds apart.
So if you look at someone's portfolio who has just been with their bank, you know, because humans, they love having relationships with people and they're loyal, but if you're loyal to a fault, it's going to show, especially in your property portfolio. And I see a lot of people that stuck with their banker for so long and they said, oh, you can't do anything and they did nothing. You're just leaving so much on the table. Like I see so many banks, like when you deal directly with a bank, they'll purposely put you on a P&I loan. They will purposely do that and they'll talk you out of going interest only just so that you have more borrowing power with them.
But whereas if you go with a broker, they know that, yeah, you'll go interest only with the major banks and the second tiers and that will slightly reduce your borrowing power with those lenders. But then because you've got an interest only loan on your existing loans, it's going to open it up with the third tiers and non-banks more than you could ever imagine. And it's better for your cash flow while you're holding the property, which is important for a lot of people. You don't want people to get the, what do they call it, Stockholm syndrome? Is that what they call it?
Where you get like, you're falling in love with your captive and the person has got you under the bank and you're sticking there, you don't know what's out there, you don't know how you're being treated and you don't realize it. I might have botched that example, but I mean, that's what it's reminding me of. The way that they cross-securitize your mortgages with all your properties and they're all tied in with each other, it can cause a lot of nightmares. We had a client who they needed to sell one of their properties and they didn't know their properties were cross-collateralized and they got to the point where the bank wasn't going to release the security because there wasn't enough equity and we had to quickly refinance both of them so that the other one could settle and sell. And these bankers, they don't really, well, they don't have best interest duty.
They're there to sell a product. They don't have to give you comparisons. Well, people who aren't aware of cross-security, what does that mean? What's an example? So generally when you deal with a broker and you're going to access equity from your principal place of residence, you're going to create a separate equity loan against your principal place of residence to use that as a deposit.
Yeah, so let's just say working example is a million dollar home. It's worth that number. You've got a 600K loan. You see 80% of a million is 800K and you've got a 600K loan currently owing and you decide to now take a 200K loan against that million dollar property, making a total loan 800. But when you log onto your banking, you're there, 600, 200.
You see two different. You can go, hey accountant, the 600 is for my home to live in. Can't claim the tax on it. It's where I'm there. But then this 200, if I'm Jack, I'm going to buy a boat.
No, I'm kidding. I'm going to use this 200 and going to put towards an investment property. That's a deposit, right? And then you would borrow money against the property. Say you're buying a property for 600.
You've got the 200K deposit that you've accessed equity loan from your own AUK. You borrow the remaining 400 or so to complete it. But then that 400 loan is secured against the investment. Now, what a major bank would love to do is- That's what we call non-cross security. That's right.
Because you've got two property A, property B, and you've got three loans. That's right. Home, deposit, investment. Yeah. Now, what a major bank would love to do is take that investment property and don't give you an equity loan, but allow you to borrow the full amount of the investment property, 600K plus stamp duty.
So you'd have two loans there and you'd have your own occupied loan of 600. And then you'd have the investment loan of 620, right? But that's the loan against that investment property is 105% loan to value ratio. The reason why they can do that is because they're using the equity from your own occupied property, but they're cross securing it so that both properties are secured by the loans. And you can't just sell the investment property because when you sell the investment property, you've got to close off the loan.
So it's- I use an example where like, it's imagine you got your left and right shoe on and instead of tying your laces with each other, like properly, you tie the right lace on your left shoe to the left lace on your right shoe. And you do that. Now, sometimes you can get out of it. You pull the string in the middle, you revalue assets, you go to different banks, you've released the equity and you're gravy. But then sometimes the pool doesn't work and you trip over, right?
And that's kind of what happens in cross security. It's an unnecessary risk. A lot of times it will be fine, but it's an unnecessary risk. And it's a tool that the banks use to make it harder for you to leave. Yeah, you can stay there longer, it's easier.
Now, I'll be the ex-banker that I am and I'll talk to you about some pros about it. But then there's way more cons. So I'm just spoiling the story already. Give me one pro. The pro is it's so easy.
When I go to my tax time and I tell my accountant, this one loan is for that property, chill. And then the accountant doesn't go, I saw you refinance between this bank to that bank. What did you use that money for? How did you close that down? Why is that loan number there?
Can you give me a CSV of this one? And like, we're what, 17 properties deep? We change banks, close off a loan. I go to the bank branches still. So I'm that, you know, OG that goes to bank branches, keeps the game alive there in the branches.
No online stuff for me because I need to go to all these closed accounts, the stuff that's not showing, the online that's not there because I refinance. Only pro. Other than that, not worth it. And if I've got one pro and you've got 10 cons, I think we know who wins. Do people still go to banks to get loans?
Like you see these new branches that are popping up, they don't even have like business bankers in there. They've just got like a teller, a couple of ATMs, no offices. Yeah, look, they're a lot more optimized, but they still pump it. They still get stuff. I mean, like, I think the biggest advantage why certain banks still crush it with loans, like CBA mainly, speed.
Like I've seen some of them get like, hey, you're overseas. Your bank wants you to sign guarantor docs for a trust. Yeah. You're five days away from settlement. We'll get you approved, digitally signed, ready to go, have this structured and settled in five days.
So I think it's like those like speed and when someone has good speed and a good experience, they go, you're my guy. I want to be my gal. I want to be with you forever. But look, bank broker aside, I think the interest rates thing coming back to that, I will say one thing though. My final thing to say on that is this.
Yes, it makes sense to buy before interest rates come down. Yes, it makes sense to not wait and buy when you can. But let's just say you can't for some reason. Or you don't happen to have that happen. Don't get in the FOMO stuff.
At the end of the day, you know, we've been buying properties for clients now for over six years. And during that six year time, we've seen interest rates fall like crazy. Interest rates rise. The pandemic, recessions, crazy amounts of stimulus. No one touching regional markets to everyone looking at markets all over Australia.
No one wanting to go beyond the backyard to now everyone being borderless investors. No one saying they're data driven to now everyone saying they're data driven. Like we've seen it all in the six years. And so during that six years, here's one thing I always tell clients. Every single year, we have to survey the markets, read the tea leaves, and buy a property that fits your portfolio that's going to outperform the market.
Every single year during the last, what, nine or 2014, I think I started my portfolio, 10 years then. Every single year during the last 10 years, I picked up a property for myself, which means this. There is no stress on macro conditions that happen or don't happen. At the end of the day, there is a market somewhere. And we've released a chart on this that will grow well in any condition, in every year, in any year, or will be a buyer's market in any year, every year.
And we can spot that. That's our X factor. And we can take that and fit it into what you have tailored to you. So that means as you're on this journey, you know, take your time. But like if it happens, it happens.
If it doesn't, it doesn't. And this is the difference between professional buying. When you're not buying with a professional, you don't have a tailored strategy. You don't have a plan that's tailored to what type of property you buy. You don't have a property that's selected in the right cycle at the right time that meets due diligence criteria that you're not rushing because interest rates are falling.
Let me go buy on a main road.
