Low interest rates can benefit property investors as much as home owners
Low interest rates can benefit property investors as much as home owners.
Investors often opt for fixed rate interest-only mortgages to maintain control of their outgoings and as such may miss out on the rate reductions. But those who have variable mortgages and investors who are taking out a loan for a new purchase or refinancing an existing property will find their costs are lower – and therefore their returns greater – than they would have been when rates were higher.
Australia’s already record low interest rate was cut again in February to 2.25% and many commentators are predicting a further cut in March. Financial markets had better-than-even odds on a rate cut to 2% at the end of February less than a week before the March announcement.
As at the end of February, 30 lenders had followed the Reserve Bank of Australia’s lead and cut their mortgage rates, according to Finder.com.au. The comparison website estimates that by March there will be 158 variable home loans with rates under 4.6%.
RateCity.com.au lists variable rate investment loans from Beyond Bank with a comparison rate of 4.35%, from Bank Mecu with a comparison rate of 4.39% plus a $595 application fee and from IMB with a rate of 4.48%. However, there are other variable investment mortgages that charge above 5.8%.
Paying 1.5% more interest on your mortgage makes a huge difference to the bottom line of your investment.
Monthly interest-only repayments on a 30-year $350,000 investment loan charging a 4.35% are $1268.75, according to Aussie Home Loans’ calculator. That’s $456,750 over the term of the loan.
At a 5.85% interest rate, the same sized mortgage would cost $1706.25 a month, or $614,250 over the 30-year term.
That’s a massive $437.50 a month and $157,500 over 30 years.
To put that further into perspective, to increase the income from the property by $5250 a year – the equivalent of the monthly interest saved by having a 4.35% mortgage compared with a 5.85% mortgage – the investor would have to lift the rent by more than $100 a week.
The sums above also ignore tax. Investors have to pay tax on rental income, whereas interest expenses on a mortgage are tax deductible.
After tax, a $100 increase in rent per week would equate to around $70 a week before deductions and offsets, depending on the investor’s marginal tax rate. Lower amounts of interest paid on a mortgage reduce the value of tax deductions.
While many investors may be locked in to a fixed-rate loan, for those with the flexibility to move, looking for a lower rate mortgage can lift the returns on an investment.
Just as owner-occupiers, investors should consider what’s right in their own situation. Investment loans may charge fees or come with restrictions. The Homeloan HQ investment refinance loan, with a comparison rate of 4.46% is only available up to maximum loan-to-value ratio of 70%, for example. Other investment loans are available for LVRs up to 97%.