What low interest rates means for property investors

With the Reserve Bank of Australia (RBA)’s cash rate (market interest rates) set at an all-time low, you might find yourself thinking whether or not now is the right time to consider buying property.

When the banks pass on interest rate cuts to consumers, a low interest rate environment is one that’s highly favorable to borrowers – allowing them the opportunity to pay down their loans faster and owe less to the banks overall.

Given a mortgage is often one of the biggest debts you’re likely to take on in your lifetime, the interest rate environment we’re currently experiencing is great for property buyers. With current rates, you can find yourself saving tens of thousands of dollars over the duration of your 30-year mortgage – but it is vital that you contemplate other costs and agendas before investing in real estate.

Property investing is generally believed to be a more comfortable asset choice (the psychology of being able to see, touch and feel the asset in the real world plays a huge role in this), and it’s not uncommon to see property purchased as an asset by investors looking to add some diversification to their portfolios. As a long-term investment, it’s often seen as less volatile undertaking; while markets do fluctuate up and down, a property will almost always go up in value, given the right amount of time.

However, while many Australian’s are comfortable with the idea of property, it is also probably one of the most expensive investments to get into upfront. Aside from your mortgage, you will always find the following upfront costs associated with buying or building a property:

• Conveyancing and legal fees
• Loan registration
• Planning and building permits
• Stamp duty
• Transfer fees

Considering these expenses (and the liability of a mortgage debt) it’s worth looking at things with a more conservative outlook when contemplating property investment. If we apply the principal of accounting conservatism (where expenses and liabilities are overstated and assets and potential revenue are understated), we need to consider the worst-case scenario.
In today’s market, interest rates may be low but economic changes during your loan period are certain, so you need to consider what a potential future increase in interest rates might mean for you. Will you be able to maintain the investment if higher interest rates means an increase in monthly repayments?

Hypothetically, if you didn’t have the means to support your investment should interest rates go up, you may have to sell the property, due to unaffordability. In many cases when the property is settled prematurely the costs associated with buying, maintaining and selling the property far outweigh the growth and the income derived (and might even leave you with negative equity). That’s why it’s imperative that you know that you meet the income feasibility test early in the property buying process.

Thankfully, there are a few checks and balances in place before a bank will lend you money. Banks and other lenders will want to know about your income and will consider whether you’ll be able to continue making repayments at a slightly higher interest rate. It’s in their (and your) best interest to confirm that you’ll be able to service a loan in the long term. It’s also worth noting that while it’s always possible for a rate increase, current market indications strongly suggest that we’re unlikely to see increases any time soon.

If you’re thinking about property investment, consulting with a professional to help you consider all the variables in the context of your personal situation is a great place to start. An adviser can help you understand your ability to borrow, guide you through setting realistic targets and make sure you get the most out of your investments. As they say financial literacy is vital, “An investment in knowledge pays the best interest”. When it comes to property investment – if you’re in a position to do something, now is a good a time as any to act. To get started, speak to The Hopkins Group today.