With the Autumn property market in full swing, the Reserve Bank of Australia (RBA) met today for its May RBA rates decision shindig and decided to keep the official cash rate on hold at 1.50 per cent.
We have no doubt that this will (if not already) generate a collective sigh of relief from mortgage holders and investors alike. With the housing market across the country as varied as the new Autumn colours, conditions in the housing market continue to vary considerably and prices are rising swiftly, particularly in Melbourne and Sydney, while in others, like Perth, prices are somewhat stagnant.
What else is going on?
Although the RBA cash rate hasn’t changed in the past few months, banks have recently announced increases to mortgage rates on standard variable investment rates of up to 0.30%, as well as interest rate increases now applied to Interest Only repayments.
So in other words, the banks are offering an incentive for borrowers to elect Principal and Interest loans instead of Interest Only repayments.
So, the question you are asking now is why?
Well, basically due to record median property price levels, e.g Sydney and increasing levels of global uncertainty and the potential for conflict, regulator APRA or Australian Prudential Regulation Authority (the official finance police) have set new rules that banks need to reduce Interest Only loans (the most common loans for investors), to just 30% of their mortgage lending, So in other words they are spreading their risk!
To read more on how the APRA police the banks go here.
Although rates are a little higher for investors at the moment, due to the APRA’s new rules banks are now competing for owner occupier home loans.
So if you are an existing home owner now is a great time to speak to your mortgage broker about reviewing your current mortgage and whether there is a more suitable lender/product offering and interest rate available.
If you happen to be a first home buyer looking to enter the market, now is a great time for you!
As of July 1st 2017, the Victorian Government have decided to abolish stamp duty for first home buyers, buying a home with a value of no more than $600,000, in other words, more dollars for your house warming party! Plus they have announced that they intend to increase the First Home Owner Grant (FHOG) from $10,000 to $20,000 for new homes built in regional Victoria and valued up to $750,000! To read more on this follow the link.
This coupled with competitive owner occupier home loan rates, put’s you in a great position, so speak to our team today.
Where to now?
For those of you who have an investment property (or multiple) the “times are a changing” and it’s important you are fully aware of what impact this has to your investment strategy as it may need to be “tweaked”!
For example, if you have an Interest Only loan that is due to expire and you would like to extend your Interest Only repayment period, the finance qualifying goal posts have now moved and the lending criteria is not the same as what you may have previously experienced. In other words, it’s now a lot tougher to qualify!
This is why we are recommending our clients get on the front foot and review their current interest only loans, including the interest rates and the remaining term, and whether they need to be extended depending on their own individual circumstances.
Of course, we understand that each and every one of our clients has different strategies and cash flow requirements and highly dependent on where they are in their investment phase (e.g. accumulation, maintenance or retirement).
This is where we can help.
We can research, explore and number crunch options for you and provide solutions if an Interest Only term is due to expire, or cannot be renewed.
We can also review whether a full (or part loan) product switch to Principal and Interest repayments is viable and what impact this has to your interest rate (e.g. it may reduce) and to monthly repayments (which would increase as you are reducing the balance and building equity in the property).
The key is to get on the front foot and start planning what impact a loan conversion to Principal and Interest will have to your cash flow, if you cannot extend your interest only repayment period. Depending on the loan balance, the remaining loan term and interest rate, will dictate the new repayments but it may not be as bad as you anticipate.
We are recommending to all of our investor clients that it might be a great time to review your current interest only term and interest rates as well as compare whether a product switch to Principal and Interest is a viable option (*Even perhaps a loan split and have a portion as P&I and % Balance as I/O).
As property investors ourselves, we understand that the general investing rule is to borrow for investment properties as Interest Only so that you free up cash flow to further accumulate an asset base. But, as the finance world and property market changes, we need to adapt our own strategies in line with this and with rate incentives on offer at the moment for Principal and Interest loans, now may be the right time to review your overall strategy and whether converting to Principal and Interest (reducing the loan balance), is the best way forward. Remember, that by paying Principal and Interest repayments, you will reduce your loan balance thus building equity faster (than waiting for Capital Growth) and could be a win-win for your long term “leave the rate race plan” AKA retirement…
It’s super important (more than ever) to speak to those who are experienced with what impact the lending changes will have on you before you make any financial decisions, or decide whether or not to purchase or apply for finance. We’re always here to help, so if you are looking to buy, refinance, fix your interest rate or invest in property, Loop in with our expert team and we’ll find the most competitive product for your needs. Get in touch with us now through one of the methods below: