Wednesday, April 25, 2012

Risks of not making early mortgage payments #2

As a follow up to my recent post on the risks of not making early mortgage repayments I ran a more detailed sensitivity analysis and came away with the following:
  • the Hong Kong investment properties will still be cash flow positive if rents drop by up to 14%
  • the Hong Kong investment properties will still be cash flow positive if interest rates increase from the current average of around 1% pa to around 3% pa
The analysis assumed a standard 12% allowance for repairs, maintenance and vacancies. In a downturn I would expect vacancies to increase. I ignored taxes.

These numbers were run as at end of April 2012.

One mortgage will come to the end of its natural life in mid 2013. At that time the sensitivity looks like this:
  • the Hong Kong investment properties will be cash flow positive if rents drop by up to 23%
  • the Hong Kong investment properties will be cash flow positive if interest rates increase from the current average of around 1% pa to around 4.3% pa
Of course the sensitivity to rising interest rates will decline by a small amount each month as more principle is paid off and cash flow sensitivity will take a jump each time a mortgage is fully paid off.

I have ignored the impact of rising interest rates on the mortgage on our home and the positive cash flow from the debt free properties outside Hong Kong.

Given the above analysis, other assets, cash on hand and the ability to cut household expenses if the need arises, I am no unduly worried about cash flow on the Hong Kong investment properties going forward.

Famous last words, I am sure.

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