As many widely-held companies, including the big four banks, cut or defer dividends in the wake of COVID-19 and interest rates remain at record lows, investors- retirees, in particular – are set to be the hardest hit.
Since the GFC, the RBA’s official cash rate has dived from 7.25% to 0.25%, with investors moving up the risk spectrum in their quest for yield. Their fear of missing out saw them pile into risk assets and now the consequences are being felt.
The COVID-19 impact on equity markets has hit hard for many retirees, on top of the impact and worry delivered to their capital with share prices being smashed
Many companies have now either cut, deferred or are not paying an upcoming dividend and this hurts retirees big-time
It is also unlikely that interest rates will be going up anytime soon. Hence cash deposit rates and bank term deposits, that many retirees have utilised for income purposes, won’t be going up to help them out for quite some time.
Getting a reasonable level of risk-free income at the moment is very difficult; investors can either accept the very low level of income and draw down on their capital, or they can probably put more capital at risk to earn higher levels of income.
For many years I have championed the cause of First Mortgages – here the Investor becomes a Lender and takes security by way of a First Mortgage over a Borrower’s property. As a Mortgagee you sit on top of the security and receive a higher level of interest then what Banks are paying (Currently upwards of 7% fixed for 12 months). The Fact that Banks are not lending or have significantly made it harder for Borrowers has increased the Demand (and interest rates) for these Funds.
One of the concerns is that how would we sell a property in the current market if the Borrower defaults. This is where the risk analysis comes in.
We need to ensure we have an up to date valuation taking into account current conditions. These are performed by Independent Valuers
The Loan to Value Ratios must be under 70 % (preferably lower subject to the property) Interest should be prepaid in advance.
Finally, at the end of the day this becomes a timing risk. If a property cannot be sold now, then as Mortgagee you never lose the property. It can be held until such time as the market recovers and then sold. Thus, the timing as you would need to be prepared to not receive interest or principal back till the property is sold. In my worst-case experience this could take 9-12 months. The bright side is that interest accrues at an additional 3% in the default period
Lenders need to determine whether or not the property is financially sound and has the wherewithal to last through crisis a pro longed sale
One of the factors that drew me to these was the hurt factor – Most borrowers will not want to lose their assets particularly with a large investment into them.