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.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment