After today’s RBA announcement you might well be wondering what this latest decision, as well as current economic fundamentals – particularly all the talk surrounding the controversial federal budget – means for the future of our property markets and investors who have their fortunes tied up within them.
Well, as property players who have been around the block a few times are well aware, this is a game of ups and downs, with little consistency and even less predictability in the short term.
Conversely in the long term, we know there is great consistency and predictability in certain segments of Australia’s residential property market, which is what makes carefully qualified, financed and purchased real estate such a solid future investment.
An interesting time
For the last eighteen or so months, some property markets around our major capital cities – Melbourne, Sydney and Brisbane in particular – have been abuzz with activity.
Fuelled by the ongoing low interest rate environment like proverbial kids in the candy store, cashed up investors with equity from the portfolio they started in the noughties, and even first timers accessing their bricks and mortar savings, are borrowing and buying.
Of course there are plenty of first homebuyers, upgraders and downsizing empty nesters on the playing field as well. With recent housing data from Residex indicating that suburbs are starting to gain increasing favour with homebuyers looking for affordable alternatives.
Here at Trilogy, we are receiving an increasing number of enquiries from clients with four or five properties, who want to know how they can leverage off their current investments to buy more.
Big boys start to play
Not content with letting the already remarkably low interest rate environment bring clients through their doors, some of the Big Four decided to up the ante last month, slicing and dicing their fixed rate offerings to all time lows.
The Commonwealth started it all, announcing a 4.99% five year fixed rate, with the NAB responding by dropping its four year fixed rate loan to 4.99% and its three year fixed term offering to 4.94%.
Of course this move reflects how the banks feel about the outlook for cash rate decisions made by the RBA over the next few years, so it will be interesting to see what they do (if anything) with today’s news. As for investors, my recommendation is to…
Tread carefully
Whilst the continuing low interest rate environment offers some enticing reasons to seriously consider adding to your property portfolio, I would urge investors to proceed with caution.
I’m in no way suggesting you should sit on the sidelines and miss out on some potentially fantastic opportunities to grow your retirement fund, but there are a few things to keep in mind…
1. Think about your financial and investment position before falling for an alluring fixed rate loan product. While some of these rates seem irresistible at first glance, there are always pros and cons with fixed products, as with any type of loan package. Weigh them up carefully.
What if the cash rate and variable loans drop further during your fixed rate term? What might it cost you to refinance or end the contract before the fixed rate period ends? What can you get alongside the loan in terms of other facilities, like redraw and offset accounts?
2. Don’t over extend yourself with the wishful thinking that this will last forever. Make sure you can not only afford it today, but tomorrow should the status quo change and your interest repayments start to consistently rise, ending up around the 7 or 8% mark.
Accessing your equity is a great way to grow your property portfolio, particularly when mortgages are so much more affordable. But you should always do so within the surety of your risk profile and long-term investment strategy.
3. Beware the competition. With more homebuyers and investors looking to take advantage of “cheaper” mortgages, there comes increased market competition. Keep a level head when it comes to qualifying a property, including what it’s actually worth, what you are prepared to pay from a purely dollars and sense decision and how it will complement your overall investment position.
Never be tempted to get into price bidding wars with overly zealous homebuyers who are making financial decisions with their hearts, not their heads!
4. Be proactive and not reactive. While it is important to keep abreast of cash rate decisions made by the RBA, it’s just as important not to be swayed entirely by interest rate moves. The current climate is a perfect example of why you need to act according to your needs and capacity when it comes to investment decisions that will influence your financial future.
Of course you will make that decision partially on the basis of current market fundamentals, but it should never be entirely because you could get a great interest rate deal!
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).