1. Re-position your leverage level on properties
The current recession is mainly caused by financial crisis, a good percentage of the economic growth and asset value have been contributed by over-leverage. Deleveraging across the world will see credit tight for many years to come, even after the economy recovers. Hence we will see tight credit markets for at least another 2-3 years if the IMF’s prediction of the global economy recovery late 2010 is correct.
You should consider at least 3 factors when you look at leverage:
1. Return on investment: this is comparing your deposit money sitting in a bank vs. being invested into a property.
2. Safety: this is to avoid negative equity or loan recalls.
3. Your own circumstances: how close you can achieve the ideal leverage level.
Ideal leverage level:
• If residential property prices were going up at 7-10% each year, higher leverage (such as 80% or above) will give you higher return on your capital invested and still relatively safe.
• If residential property prices were to be flat or even slightly down each year, lower leverage (60% or below) will give you a higher return on your capital invested and it is also safer to keep your leverage lower.
In my opinion, our current property market trend is likely to be suitable for 60%LVR or below if your circumstances allow you to do so.
If you must stay at higher leverage, your income should at least allow you to pay down your mortgage principal on a monthly basis. Because paying down your mortgage is similar to lending your money to the lenders. The lender is paying you the interest rate your mortgage is costing you; you have effectively become a lender. Lenders make more money than borrowers in a deleverage economy.
Many people are concerned about lenders recalling their mortgages if they show negative equity. For most private property investors and homeowners, negative equity will not be the main reason why the lenders would recall your loans. Lenders would usually recall loans when the borrowers fail to make repayments.
However if you are one of those property investors with a very large property portfolio or run a business with credit facilities with the same lender, you may want to separate the business credit facility from your mortgages and reduce the exposure to a single lender. This can avoid the unnecessary risk of your mortgage being reviewed by the lenders at an inconvenient time.