Ignoring the property market could cost you millions of dollars over the long-term, explains Richard Sheppard.
You may not have guessed it from recent media headlines, but interest rates are at historical lows in Australia. That’s right – rates are at their lowest point in the past 60 years. Despite this fact, some property investors are getting cold feet in the belief that access to finance will dry up as banks tighten their lending criteria. To make it very clear, this is not the time for doom and gloom. Yes, it is true that banks are under the pump from the Australian Prudential Regulation Authority to help cool down an overheated property sector in some cities. In the past couple of weeks, the four major banks have started passing on interest rate hikes of between 0.27 and 0.29 percentage points to property investors. Many banks have also started lifting their minimum deposit amounts for purchases. The good news is that, despite such actions, the investment finance market remains strong and rates are still very low in the bigger scheme of things. The key – as always – is to do your homework and make sure the financial numbers stack up when you buy an apartment or house. Here are a few lessons that will help you stay on track to grow your wealth and potentially make you millions of dollars in the years to come.
1. Don’t stretch yourself
Regardless of market cycles, smart investors use their borrowing capacity for maximum effect without overstretching themselves financially. Having a clear understanding of your equity position and creating a safe borrowing strategy is the key. Getting this right will give you confidence – and help you secure finance, too.
2. Select lenders carefully
Sure, rates have gone up slightly for investors, but in any case, the best property investors don’t choose lenders based on rates alone. The right lender, or lenders, will depend on your personal and financial goals. Notwithstanding the directives from APRA, each lender has individual policy requirements that you need to understand so you can get the best deal possible.
3. Find a good finance broker
The recent changes underline the importance of getting good advice. An experienced broker with specialist property investment expertise can realistically increase your returns by 30 per cent to 50 per cent while reducing risk by using better finance structures, valuations, lender policies and packages. Such gains far outweigh the impact of minor rate rises.
4. Be selective with off-the-plan purchases
One area that requires caution in the new rates environment is off-the-plan purchases. Investors who may have committed to long-term deals to buy apartments off the plan – for example, settlement periods of a year or more – may discover that finance has suddenly become both more expensive and harder to get as the properties finally near completion.
This article was originally written by Richard Sheppard for the Sept 2015 edition of Peninsula Living Magazine.