RBA Governor Predicts Interest Rate Rise - Should People Be Staying Away From Investing In Property?

We have seen a substantial change in the market since the beginning of July. Properties are selling much faster and are achieving better prices than before.

Being able to borrow money is still much more difficult than it has been in previous years. Although rates have dropped and most lenders are selling standard variable rate products between 5.1% - 5.7% the qualifying rate most lenders are using is around 8% - 8.3%. The loan repayments are then set at the lower selling rate however if rates increase the borrower should still be able to afford the loan repayments based on the test done at the higher qualifying rate.

Don’t assume though as a borrower that if the lender approves your loan that you can afford it. Do a proper budget to establish whether you have the cash flow to fund all the expenses as the lenders do not run a cash flow test – remember they are not asking you for a detailed budget.
Rates going up and down don’t affect property investors as much as they do home owners. A property investor has a rental income and then a loan to service however they also get to claim all their expenses and offset any shortfall against the tax they pay on their personal income. As interest rates go up their tax rebates increase and when rates come down their tax rebates decrease so from a cash flow perspective it doesn’t make a huge difference unless they have no taxable income.

Traditionally when property prices are on the increase rents tend to plateau and when prices plateau rents tend to be increasing. Higher interest rates and rent increases tend to be in the same cycle which assists with the increased loan payments. Lower interest rates and capital growth tend to be in the same cycle.

We have just been through a slow capital growth high rental growth period. Rents appear to have peaked and are now consolidating and prices appear to be moving so it appears as though history is repeating itself despite the so called “global financial crisis” which now seems to have bypassed Australia.

For home owners I believe it’s a very good time to buy because rates are low – pay as much extra as you can into your mortgage so that when rates go up you have buffered yourself against the rise. Also ensure you can afford a loan repayment at 7.5% because this is possibly where rates will settle over a few years.

For investors leverage as much as you can – however do detailed cash flow projections to ensure you can fund all property related expenses and still have a life even when interest rates go back up.

Over the past 11 years, my company Votiva has assisted hundreds of families build their wealth through investment property. We require our clients to do a thorough budget and we assist with cash flow projections prior to purchases to ensure they are not going to get into financial difficulty if the market changes.

Most of our clients have multiple investment properties and have never been at risk of defaulting on their loans because we thoroughly tested our client’s cash flow position prior to them borrowing. By doing this our clients have total peace of mind with their cash flow and a solid plan to follow. In our opinion it’s the only way people should be borrowing money. The last thing you want is for property investing to be stressful. It is also important to build in buffers so that if you were to lose your job you have time to find another without defaulting on your loans.

So with the Governor talking predicting home loans to rise, what should we do? Well, I believe we should be buying property right now and there are a number of great opportunities in the market. However, as I mention, please make sure you do your cashflow projections and have built in buffers. If you invest strategically starting now, you could easily set yourself up for a great future.

If you would like to invest in property and want to find out more about how to do so with your current financial status, please contact me at enquiries@votiva.com.au for a free consultation.

Has the Property Market Reached a Bottom?

Interest rates are currently at a 49 year low and real estate agents are reporting higher and higher levels of enquiry. Buying activity has also been reported to be on the increase so the question to be asked is, “Is this the right time to be re-entering the property market?”

Well, with First Home Buyer activity starting to slow due to the government’s additional First Home Owner Grant about to expire, I think now is the time for investors to re-enter the market. Yes, we will need to be cautious as there is still some economic uncertainty but the worst is definitely behind us, as can be seen in the renewed strengths of the global and local share markets.

NSW has seen one of the longest property price stagnations in history so there are definitely some bargains to be had, although investing in property is a long term strategy. In South East Queensland, the strong population growth will eventually give rise to a shortage of supply as available properties are snapped up. As we know, anywhere where there is a shortage of supply and excess of demand, prices must rise.

Yes, there is currently an oversupply of rentals but if you are looking at the long term and current property trends, it is quite likely that this oversupply will be filled very quickly. So now could be the time to snap some great bargains with the mindset of investing for the future.

My belief is that there has never been a better time to invest in property – the four factors of the strengthening economy, massive government infrastructure spending, record low interest rates and improving market confidence I believe will form a perfect storm and we will see property prices start to rise once again. I am looking forward to scouting some great bargains right now and you might want to consider the same. Remember, as always, when investing in property, make sure you get some good advice and buy the right property for you – the one that makes sense for your current financial position and your long term goals.