Last Tuesday, the RBA cut the cash rate to a low of 2.5%, which hasn’t been seen since the 1950s. While this may be a symptom of a failing economy, it’s great news for property investors.
Here’s why:
Low interest rates mean less money needed to service a mortgage, which is great news for investors. Having interest rates at 4.88% versus the 2002 high of 8% means a saving of $582.59 per month on the average mortgage ($300,000 over 25 years). With every interest rate cut our serviceability to buy property improves. This is because our loan repayments will be smaller (as we are paying less interest) and the banks calculate that we can service larger loans. Therefore, we are more likely to get a loan approval for that investment property purchase! This is fantastic for investors because if we have a rental yield of 6% or higher and our fixed rate is 4.5%, our investment properties will pay for themselves, all the while earning us a good income for the term of the fixed rate. When the fixed rate period ends, we can then decide whether to sell the property, depending where it is on the property clock, or hold for more growth.
I will give you a quick hypothetical scenario of what could happen. Check out this table demonstrating the annual revenue based on an interest rate of 4.5%.
|
Property Price |
$300,000 |
|
Loan amount 95% |
$285,000 |
|
Outgoings |
|
|
Loan costs p.a @ 4.5% |
$12,825 |
|
Rates and water |
$1600 |
|
Landlord and house insurance |
$1000 |
|
Property management |
$1200 |
|
TOTAL |
$17,425 |
Not only do low interest rates increase our cashflow, they actually improve our capital gains as well. Tim Lawless states, “Since the housing market reached a recent low point in May last year we have seen dwelling values rise by 6.5% based on the RP Data – Rismark combined capital city index. That equates to a gross profit of around $30,000 for the average home owner.”
Lower interest rates encourage owner-occupiers to move into the market, as some areas will become cheaper to buy in than rent. This creates a huge demand for houses, which pushes up property prices, particularly in low supply areas. When there is high competition for dwellings, house prices surge. This is great news for investors as the equity in your properties will grow much faster and will be able to be accessed sooner. Now is the best time to increase your portfolio! Keep in mind that a huge surge of demand from property buyers can lead to less of a demand for rental properties and rental yields often see decreases but our cashflow with the new lower interest rate should remain the same. “For investors, with the average discounted variable mortgage rate now approaching the 5% mark they are likely to find more and more properties are approaching a cash flow neutral or cash flow positive yield,” says Lawless.
Only time will tell how these record cash rate lows will affect the Australian property market, just don’t sit on the sidelines and watch.
Sam Saggers is CEO of Positive Real Estate and Head of the buyers agency which annually negotiates $250 million-plus in property. Sam's advice is sought-after by thousands of investors including many on BRW’s Rich 200 list. Additionally Sam is a published author and has completed over 2000 property deals in the past 15 years plus helped mentor over 2200 Australian investors to real estate success!
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
