DPN’s Director of Finance has 20 years experience in finance and banking. He knows mortgages inside and out with particular interest in systems and processes.
The winds of change are sweeping through Australian lending. It’s making some property investors nervous; but they shouldn’t be. Here’s how to make the current market work for you.
Bank loans are tightening but still workable
The banks are changing their loan policies week to week at the moment. Right now we’re seeing an increase in rates for interest only loans by all the major banks.
Banks have also dropped interest only loans down to 80% for investment loans. That means, if investors want to borrow 90% of the property value they will be forced to pay principal and interest repayments. It’s certainly harder for investors to maximise cash flow and leverage on loans.
If it’s hard for you to get into the market then it will be harder for everyone. This makes it a good time to buy.
This may make you think that now isn’t the time to dip into property investment. You may feel the demand for cash flow is too great. However, you have to adjust your expectations.
It’s good to step back and take a broader, more holistic view. If it’s hard for you to get into the market then it will be harder for everyone. This makes it a good time to buy. It means there’ll be fewer investment properties and rental yields will go up. So finding a positively geared property is easier in this scenario. That means you’re more likely to find a property where the rental income covers the mortgage and associated costs.
Find the sweet spot of getting a positively geared property.
It’s all about the bottom line
The main perception is the affordability. Take a trip back to ten years ago to the crunch time of the GFC. Interest rates were a lot higher and you still had to pay a deposit out of your pocket. Right now interest rates are at near record lows.
So now competition will be reduced, increasing the prospect of getting a bargain when you buy, plus it’s easier to find the sweet spot of getting a positively geared property.
But what about the extra cash you have to find out of pocket to cover principal repayments with the new shift in investment loans? Yes, you may have to find extra cash, depending on your capital and your loan, but that means you’re paying down debt. Paying down debt is a good thing.
If you’ve got in early with a low interest rate loan and a positively geared property you’ll be able to reap the rewards deep into the future.
We may well see interest rates go up in the future. In fact, it’s highly likely this will happen sooner than we think. In which case, if you’ve got in early with a low interest rate loan and a positively geared property you’ll be able to reap the rewards deep into the future.
So the new frontier is to adjust your expectations when shopping around for a loan. If it does mean paying a bit more out of pocket, remember your ultimate goal is to build wealth.
Remember loans are flexible. You can adjust them and tweak them to suit your needs at the time. You might want to make it interest only, or make them fixed or a mixture of the two. They’re like levers of a money machine that you should always think about adjusting depending on where you are.
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From the new Federal budget we know that the Government is going to change how depreciation can be claimed on older residential properties. We don’t yet know the full details. We do know “plant and equipment” items will be affected: this includes dishwashers, ceiling fans and other fixtures.
What does this mean for the investor? Unless you paid and bought the fixtures yourself and have remembered to keep the receipts, or bought the property brand new, you can’t claim these back. Therefore I strongly recommend looking at buying newly build properties. These allow you to claim depreciation and, being new, their immediate value is always greater, plus they are very attractive to renters.
Finally, remember that there’s not just one property market in Australia, but as many markets as there are suburbs. There will always be a opportunity in one of those markets. The demand for property in this country hasn’t cooled and, if you can navigate through the new financial waters you’ll be able to harvest excellent long term rewards.