Purchase of second property

Good morning,


I bought a property 2 years ago for about 6 M which is now worth about 8 M. The mortgage is now about 50% (4 M). I also have 1 M in the bank.


I am thinking whether I should make a second mortgage now, not remortgage the whole property, but borrow an additional 1 M, wait for the prices of properties to drop, and then use that 1 M + the 1 M I have already to buy a second property.


I might have to wait for 1 or 2 years before property prices have dropped sufficiently, so I would put that additional 1 M I borrow in inflation-linked HK government bonds. They now give a return of about 4.3% /year. They are priced about 104, and expire in about 2 years from now. Since the mortgage rate is about 2.15%, if I borrow the money and buy bonds with that money, I am set not to lose much until 2016. In 2016, if the prices of flats haven't dropped (much), I can either repay the mortgage, or put the money in something else. If flat prices have dropped I can buy a new flat.


I want to see what you think of this plan. I think the risk of loss is relatively small (I can live with a loss in the tens of thousands), and this will give me the cash to buy a new flat if the prices drop sufficiently. Prices always go up and down, and if I don't make a second mortgage now I won't have enough money to buy a flat when the prices will go down again.


Thanks for your insights.

Thoughts:


- what does the mortgage rate track (HIBOR, LIBOR?) and what does the government inflation protected bond track (some phony government CPI stat?) If they are tracking the same thing then presumably you will be ok, but if they track different things (lending rate vs government proclamation of what inflation is) then you can get burned badly.


- if you are successful in using your current mortgage to bridge into a second property purchase, will you be able to manage the mortgage payments at the new higher interest rate? If property prices go down as you indicate, interest rates are likely going up, which means your mortgage will be a lot more expensive to carry. What if mortgage rates were up at a modest 5%? On your 5mil mortgage that would cost you 250k per year or 21k per month of interest payments. And you'd be paying all that interest to own two property assets which are decreasing in value. Can you handle that financially? Can you handle that emotionally? Remember that the last time HK prices went down they were in the dumps for ~4-5 years, can you manage that?

You are paying 104, for something you will redeem at 100, right?


I think you need to be very careful with a transaction like this, since this part of the transaction will give you a loss. Or maybe I have misunderstood...


(I like your posts, Count. Including the threads you start. But your name is just too long. As it is, it disturbs the spacing on the page, when you have a thread. Can you shorten it to: Count Riccardo, or something?)

OTP is right (on both return and name). When you say 4.3% are you talking about the coupon or the yield? The coupon is irrelevant, it is the yield that matters. If it is selling at 104 and still maintains a yield of 4.3% then its coupon must be enormous, which I doubt the government would do. Hence I suspect 4.3% is the coupon and the yield is actually more like 1% or less (just a guess).

Thanks. Sorry about my long name. As far as I know, I can't change it now. I would have to register a new account.


What I would do is basically borrow 1 M at a low interest rate (currently 2.15) and park it in ibonds until the prices drop, and then buy a new property. Yes, I would have to consider whether I can afford to repay a 5 M mortgage at 5% interest rate. I think 5 is still fine, but 8, 9, 10 would be very painful.


Lucane, the 4.3% is the interest rate paid last month. Now the government says that inflation is 4.3. If inflation drops, they would pay less and I would lose out. If inflation increases they will pay more and I win. 104% is the price of the bond. Which means in the first year I make 0%, but if inflation doesn't change, the second year I make 4.3%. If I still pay 2.15% interest on the mortgage, I would end up not losing anything.


If, say, prices drop by 20% and I buy a new flat, I would have one flat (my own flat) with a 90% mortgage, and one flat with a 70% mortgage.


If indeed there is very high inflation, then mortgage rates may go up to 15% or more (as I believe they were in the late 1990s), and I would go bankrupt. That's a possibility too.

I think that times are very risky and uncertain now and you should play everything safe and "batten down the hatches." With my personal assets I am playing everything as safe as I can and my goal is just to preserve wealth and keep dry powder ready for when the prices do drop.


Personally I am not levering myself. Inflation / deflation, it can go either way. If it goes the inflation way you can be happy that you got yourself a free extra shoebox apartment. If it goes the deflation way you might bankrupt yourself and lose it all. Is that a good trade to make? I don't think so.


Times are too uncertain and the financial system is too unstable, so my advice is just to avoid it all until things eventually return to normal (after a crisis). SHIBOR rates in China easily spike 200bps overnight, how would you like to get clobbered on your mortgage if the HIBOR starts doing that? When credit crises happen rates are not going to be a modest 5% but more like 15% or higher.

A crash is coming in the markets - all the markets - and maybe soon.


That is my view. With that view, I suggest keeping it simple, and not trying complex arb strategies.


If you have a good job, bank as much as you can each month. Keep it in a safe place. (A safe bank? Gold?)

OffThePeak, when you say all markets? do you mean global crash or regional crash? or do you mean by sectors?..i.e. property crash vs stock market

I have some technical indicators suggesting a top in stocks soon.


I found Harry Dent's recent interview for C2C very interesting. I will start a thread about it, and link to it from here