A lot can happen in a year. Just twelve short months ago lenders were starting to reconsider whether they should be tripping over themselves to offer investors discounted mortgage products, as APRA began making regulatory waves.
Now there’s no doubting that those looking to profit from residential property have fallen out of favour, as owner-occupier borrowers so obviously become the financial services sector’s latest pet.
Kicking off February with the release of their Statement on Monetary Policy, the Reserve Bank of Australia revealed that average advertised standard variable mortgage rates for owner-occupiers are now 30-basis points lower than they were a year ago.
Overall, the RBA says there’s been “a dispersion of housing interest rates across lenders over recent months, with the major banks raising housing interest rates by more than the mid-size lenders and smaller lenders.
“In the second half of 2015, most lenders increased their standard variable housing interest rates by 15 to 20 basis points, after raising rates for housing investors in the middle of the year.”
Investors have been hit by a double whammy; being forced to jump through increasingly complex serviceability hoops and having our leveraging power diminished with the application of higher rates on investment based borrowings.
Unless you have some inside help…
When it comes to the banks’ interest rate agenda, the bottom line is pretty clear – they’re in it for the profits. Sure, lenders appear to simply be appeasing the regulatory gods, but what their interest rate decisions are actually guided by is a need to keep shareholders happy.
These days, it can literally pay (sometimes thousands) for you to have an experienced and knowledgable mortgage broker on side who can cut through the BS (Bank Speak!).
Now more than ever it’s critical to pay particular attention to how you structure and finance each new acquisition and consider whether refinancing might free up your current equity position further, to provide greater leveraging power.
Not all about interest
While it might seem as though the interest rate tide has turned against investor borrowers, it’s crucial to remember that loan structuring shouldn’t be based on the cheapest possible mortgage, but the best one for your individual circumstances, as well as your investment objectives and strategy.
Lower rates for owner-occupiers will often come with the proviso that they borrow at a lesser LVR for instance, of 80 per cent or under.
Consider how your buying capacity could be inhibited if you were forced to forego the option of paying a once off LMI fee and leveraging at a higher LVR of say 90 per cent, just to save a few bucks during the honeymoon phase of your loan.
If you could rustle up a $50,000 deposit from your existing equity base (plus costs), this would mean the difference of being able to purchase a potentially higher yielding asset for $500,000, as opposed to a lesser property for $250,000.
Over time, you’d obviously stand to make a lot more back in capital gains and average returns than you could possibly hope to save on a slightly lower interest rate, by borrowing at a higher LVR.
In fact, if we apply some figures to this example and say the more expensive investment attracts per annum growth of 10 per cent, whereas the $250,000 asset achieves an average 7 per cent, you’re looking at an additional $720,000 for your retirement portfolio.
That half a million dollar purchase will have more than doubled in value over the decade to around $1,179,000, while the $250,000 dwelling failed to even match the initial purchase price of the more expensive asset.
Not to mention the extra interest you would have paid over time means a bigger claim at tax time!
So how do you work out what’s best?
A good broker can easily demonstrate these types of comparisons and show you how the different decisions made around your loan portfolio can either positively or negatively impact your future fund.
Importantly, we know that the best rate doesn’t always equate to the best deal, and have sufficient inside understanding to know how certain products and lenders would best align with your current situation, as well as your short and long-term goals.
If you would like to know more about how one of Trilogy’s experienced brokers can help you to implement advanced structuring strategies and make the most of your leveraging power, why not connect with us today?
Click here now and one of our team will arrange an initial phone consultation to explain how we can help your debt portfolio work harder for you.
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).