There is no doubt that the record low interest rates that Australians have enjoyed for the last few years have been a boon to those interested in investment property. Last month’s cut in interest rates, from 2% to just 1.75%, is the first cut since May 2015. While investment loans are generally subject to a range of different factors, the continuing low interest rates are certainly a good sign for anyone looking to buy their first property or extend their existing property portfolio.
When you’re first starting out in property investing, you may wonder how interest rates will affect you and the decisions you make about your investment strategy. Essentially, from a consumer point of view, interest rates are simply a guide to the cost of borrowing money. The Reserve Bank Of Australia meets every month to determine the rate, and the decision is based on a range of factors such as the current employment outlook, building and construction data and levels of inflation. Once the decision has been made, banks and other lenders then decide whether they should pass on all or some of the rate cut to their customers.
The record low rate of 2% over the past year has had a noticeable effect on the property market, with more and more people seeking to get into the market either as owner occupiers or as landlords. This has had a knock on effect, with apartment and house prices rising at record levels particularly in Sydney and Melbourne. Interest in investment property peaked last year, with growth in investment lending recorded at 21% in March 2015. Since the regulator, APRA, has recommended the banking industry tighten its lending requirements for investors (including measures such as ensuring applicants could repay a mortgage if the interest rates rose an additional 2% above the current rate) the rates of investment lending has fallen, although the market remains strong.
As an investor, low interest rates means you may be able to afford more for your money – so the cost of borrowing the money you need may be cheaper – obviously depending on the type of loan you are looking for. With such low rates, it is also tempting for investors to consider “locking in” the cash rate by choosing a fixed interest loan over a variable mortgage. This can be a sensible strategy as it gives you a clearer picture of your costs going forward, although keep in mind that there are indications in the market that the Reserve Bank may consider lowering rates even further over the coming year, depending on the economic outlook.
The best strategy is to do your research and understand the factors that determine such changes in the cash rate. Keep an eye on media reports about interest rates, and whether it’s likely they will move lower or stay fixed at the current record lows.