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What to look for in an investment property

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Interest rates have been going up in recent months. But on the flip side, property prices have been falling in many markets.

That means there could be some great opportunities out there for aspiring property investors. It all comes down to finding the right property in the right location.

Here’s what to look for in an investment property.

Capital growth potential

Optimally, you’ll want to find a property that’s likely to increase in value over time. But how?

Look for areas that are experiencing economic growth. Economic growth creates jobs. Jobs bring people to an area. More people equates to more demand for housing. And more demand can lead to capital growth.

You’ll also want to choose a property that has good access to amenities like hospitals, shops, and transport. Check the school zoning too, as this can be a big drawcard for families.

Rental yield

Rental yield is the rate of income return compared to the costs involved in owning an investment property. It’s typically expressed as a percentage and may be calculated as a gross or net figure.

High rental yields can be attractive to investors, as it means the property will generally generate a steady cash flow.

Low vacancy rates

The rental vacancy rate gives you an indication of the percentage of rental properties that are unoccupied. For example, if a suburb has a vacancy rate of 4%, it means 4% of rental housing is not tenanted.

Higher vacancy rates might mean more properties than renters, so your property could sit vacant longer and rent for less.

Lower vacancy rates could imply a tight market, more competition amongst renters for available properties and potentially higher rent.

Proposed planning changes

When researching a suburb, it’s important to investigate any proposed planning changes that could affect your investment.

Say planning laws and density limits change, allowing an area to be flooded with townhouses and apartments. The increased housing supply could make property prices and rents fall.

Features and lifestyle factors

Think about the kinds of features that may resonate with future tenants. It might be a second bathroom. Storage space. A garage.

Also, weigh up the lifestyle appeal of a suburb. Are there parks nearby? A beach within walking distance? Cafes or entertainment? All of these offerings can make a property more appealing to tenants.

Low maintenance costs

You don’t want to be forking out massive coin for maintenance and repairs that eats into your profit potential. Instead, opt for a property that is low maintenance.

An older property might require more upkeep than a newly constructed property. Think ageing hot water systems, old plumbing or electricals.

Likewise, a property on a bigger block might mean more garden maintenance – something your future tenants might not have time for.

Ways to add value

Look for properties where you can add value easily. You might be able to give the property a facelift with a fresh coat of paint, for instance, or a cosmetic makeover at some point.

Doing a simple renovation can accelerate capital growth, as well as boost rental returns.

Ready to get started?

Buying an investment property can be a clever way to build wealth. However, before diving in, it’s a good idea to seek independent financial advice from a professional advisor and/or your tax accountant.

If you do decide it’s the right move for you, we can support you with:

• Free property reports to guide you in your property hunt
• Tips on how to budget for an investment property
• Pre-approval on your investment loan
• The loan application and approval process
• Finance to renovate your investment property
• Advice about your investment loan in the future.

We’re here to help, so please get in touch.

What should I do when my fixed rate expires?

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If you’re currently playing the waiting game wondering what will happen when your fixed rate term ends, we understand what a stressful time it might be.

Fixed rate borrowers have been temporarily shielded from the Reserve Bank’s cash rate increases, but for how long?

It’s estimated that almost 40 per cent of Aussies on low fixed rate loans will roll off them next year. This could result in a considerable increase in mortgage repayments for households that are already stretched with rising cost-of-living pressures.

If your fixed rate is expiring soon, now is the time to review your home loan and make a game plan.

Questions to ask when reviewing your home loan

As a first step, think about your current loan, your personal circumstances and goals.

• Is your loan working for you?
• Are you using any features such as offset accounts or redraw facilities effectively?
• Has your financial or family situation changed, and could this affect the type of loan that’s right for you?
• What are your intentions for the property (hold, sell, use the equity to renovate or buy an investment property)?

The answers to these kinds of questions may ultimately drive what you decide to do when your fixed rate expires.

What happens when my fixed rate ends?

Your lender will likely get in touch with a new offer to re-fix your loan closer to when the loan term ends. If you do nothing, your home loan will usually revert to your lender’s variable rate.

What are my options?

Once your fixed term ends, you can stay with your current lender or refinance to a new one. You could:

  1. Re-fix your home loan. With this option, you’ll know exactly what your repayments will be during the fixed term and can budget accordingly. However, you may be up for break costs if you end your fixed term early.
  2. Switch to variable. Variable rates may be lower than the proposed new fixed rates and there may be advantages such as loan features and unlimited repayment options to help you get ahead. But if the cash rate increases, your interest rate may rise too.
  3. Split your loan. This is when a portion of your loan is fixed and the remainder is variable, potentially allowing you to benefit from both loan types.

Can I extend my current fixed rate mortgage?

Unfortunately not. However, you can fix your home loan at a new rate. Most lenders offer fixed terms of 1 to 5 years.

What if I re-fix then need to sell or refinance?

If you do fix your interest rate and need to sell or refinance, you may have to pay break fees to the lender.

Break costs can be expensive. The amount you’ll be up for depends on a range of factors, including the lender, the loan amount and the time left on the fixed term.

Usually, there are no penalties associated with refinancing from a variable rate.

What can I do if interest rates have gone up when my fixed rate ends?

The most important thing is to shop around to ensure you find a competitive loan that suits your financial circumstances and goals.

Consider all aspects of a loan product – not just the interest rate. What features can save you interest? How does one lender’s fees compare to others?

Remember, you may be able to find a more suitable loan with another lender.

We’re here to help

With so much uncertainty around how much higher interest rates may climb, you have every right to be concerned. Rest assured we’re here to help you through this difficult time.

We can review your mortgage and explain whether it still meets your needs. Get in touch today.

Property Market Update – August 2022

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Another month, another cash rate rise. The Reserve Bank of Australia (RBA) increased the cash rate to a six-year high of 1.85% in August, prompting some lenders to increase their variable rates by 0.5%.

Meanwhile, nationally home values are falling at the fastest pace since the 2008 global financial crisis (GFC). CoreLogic Research Director Tim Lawless recently said the market had moved in favour of buyers over sellers, especially in cities like Sydney and Melbourne.

If you’re planning a spring property purchase, speak to us about pre-approval on your finance.

Interest rate news

At its August meeting, the RBA hiked the cash rate by a further 50 basis points to 1.85%.

It’s the fastest tightening action in almost 30 years to try to address inflation and the first time since the introduction of inflation targets in 1990 that the RBA has increased the cash rate four months in a row.

For the average borrower with a $500,000 loan and 25 years remaining, the rise will result in a $140 a month increase– or $472 since the RBA began putting up rates in May 2022.

More cash rate increases are expected. Recently Treasurer Jim Chalmers said customer price inflation was forecast to peak at 7.75% by December and would not fall within the RBA’s target range of 2 to 3% until 2024.

If you’re struggling to meet your mortgage repayments with the recent interest rate rises or you want to review your home loan, talk to us. We’re here to help.

Home value movements

Australian property prices are falling at the fastest rate since the 2008 financial crisis, according to the latest CoreLogic figures.

The nation’s median property value has dropped by 2% since the beginning of May to $747,182.

In July, we saw Australian dwelling values fall by -1.3%, with five of the eight capital cities recording a month-on-month decline.

Mr Lawless said housing market conditions were likely to worsen as interest rates surge higher to the end of 2022.

“The rate of growth in housing values was slowing well before interest rates started to rise, however, it’s abundantly clear markets have weakened quite sharply since the first rate rise on May 5,” he said.

“Although the housing market is only three months into a decline, … the rate of decline is comparable with the onset of the GFC in 2008, and the sharp downswing of the early 1980s.

“In Sydney, where the downturn has been particularly accelerated, we are seeing the sharpest value falls in almost 40 years.”

Regional markets have also softened.

All dwellingsAuctionsClearance RatePrivate SaleMonthly home
values change
VIC69451%1210▼ -1.5%
NSW67245%1287▼ -2.2%
ACT6851%89▼ -1.1%
QLD28028%1178▼ -0.8%
WA1315%661▲ 0.2%
NT4– %25▲ 0.5%
TAS0– %136▼ -1.5%
SA15653%319▲ 0.4%
* Monthly Home Values figures as of 31 July 2022
* Australian auction results, clearance rates and recent sales for the week ending 7 August 2022
* The clearance rate is preliminary and current as of 10 am AEST, 10 August 2022

If you’re looking to make the most of the price drops this spring, get in touch to arrange pre-approval on your finance now. We’ll line you up with a competitive home loan that meets your circumstances and goals.

Additional sources
CoreLogic RP Data Daily Home Value Index: Monthly Values
CoreLogic Auction Results
https://www.realestate.com.au/auction-results/

What does the cash rate increase mean?

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News of the Reserve Bank of Australia’s (RBA) decision to increase the official cash rate has left many homeowners feeling uncertain and worried. For some, it’s the first time they’ve experienced a cash rate rise.

If you’ve been left scratching your head wondering what this means for you and your wallet, I’m here to help. In this article, I’ll answer common questions about what the RBA’s decision means for you.

What was the RBA decision?

On May 3, the RBA raised the official cash rate by 25 basis points to 0.35%.

This is big news as the official cash rate has been at a record low of 0.1% since November 2020 and the last time the RBA increased interest rates was in November 2010.

Why did the RBA increase the cash rate and what does it mean?

The RBA generally increases interest rates when inflation reaches a certain point (the goal is to keep it between 2-3%). Inflation is the main measure of cost of living, or how much our money is worth, and it’s taken off in Australia.

The latest inflation data showed Australia had recorded the highest quarterly and annual increase in more than two decades.

By increasing the cash rate, it appears that the RBA is trying to slow down demand in the economy and discourage people from spending money. Bigger repayments can mean less money to splash around elsewhere.

What’s the impact on homeowners?

Once the RBA raises the cash rate, lenders often pass this on to borrowers via an increase in their variable interest rates. Some lenders have already begun passing on the rate increase in full.

Even a small increase in your variable interest rate could have an impact on your repayments.

As an example, say you’re a homeowner in Sydney who purchased a property at the median house price of $1,403,154 with a 20% deposit. Your monthly repayments might jump from $4,727 to $5,288 if the cash rate were to hit 1% (which is tipped to happen by the end of the year) and your interest rate increased from 2.99% to 3.89%. That’s an increase in repayments of $561 a month.

What happens to repayments across Australia with a cash rate at 1 per cent?

RegionMedian House PriceLoan amount (20% deposit)Monthly repayments at 2.99%Monthly Repayment at 3.89%Increase in paymentIncreased cost over 30 years
Sydney$1,403,154$1,122,253$4,727$5,288$561$202,178
Melbourne$999,037$799,231$3,365$3,765$400$143,949
Brisbane$856,731$685,385$2,886$3,229$343$123,444
Adelaide$658,446$526,757$2,218$2,482$264$94,874
Perth$568,108$454,486$1,914$2,141$227$81,858
Hobart$791,587$633,270$2,666$2,983$317$114,058
Darwin$569,647$455,718$1,919$2,147$228$82,079
Canberra$1,055,812$844,650$3,557$3,979$422$152,130
National$805,621$644,497$2,714$3,036$322$116,081
This table estimates the effect of a 0.9 percentage point interest rate rise on recent purchasers of a median priced house with a 20% deposit. House price data from CoreLogic 31/3/2022, rates via Canstar database.

 

Those on a fixed-rate loan will be temporarily shielded from the cash rate increase until their fixed rate period ends.

There could also be other flow-on effects for homeowners from the cash rate increase, including further downwards pressure on housing growth rates, which were already losing momentum.

Are further cash rate increases expected?

This appears likely. Reserve Bank governor Philip Lowe said the Board was committed to doing what was necessary to ensure that inflation in Australia returned to target over time.

“This will require a further lift in interest rates over the period ahead,” he said.

Lowe indicated it was not unreasonable for the cash rate to climb to 2.5%.

What do I do if I can’t make my repayments?

With interest rates likely to continue going up, it’s important not to be complacent. Now is the time to review your home loan to make sure it still meets your requirements.
We can review your home loan, explain whether your lender is passing on the cash rate increase and how this will impact your repayments.

If you think you may have difficulty meeting your repayments, here are some options to consider:

• request a lower interest rate
• temporarily switching to interest-only repayments
• fixing your interest rate may help you budget for repayments
• asking for fees and charges to be waived
• consolidate debts to make repayments more manageable.

We’re available to discuss these options, so please don’t hesitate to get in touch today.

What’s a fair price for a property?

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How do you know how much to pay for a property? As a buyer, it can be tricky.

Offer too much and you’ll end up paying more than market value. Offer too little and you risk missing out on your dream home or investment property.

So, how do you ensure you’re getting a good deal whilst remaining competitive against other buyers? Here are some tips.

Look for recent sales in the area

Start by looking at what’s been selling in your preferred neighbourhood. Focus on the immediate area surrounding a prospective property (say within a few kilometres), as values can differ greatly within the same suburb.

Historical price trends are great for background information, but for an accurate gauge of today’s prices, focus on sales within the last few months.

Look for similar properties

If you’re wanting to buy a three-bedroom home with two bathrooms, there’s no point looking at sales of one-bedroom units. To be relevant, comparable properties should be pretty similar to the one you’re sussing out.

Features to consider:

  • Dimensions – are the land area and dimensions similar?
  • Location – look for properties that are the same proximity to local amenities (like schools and transport lines) as the one you’re interested in
  • Interior – compare properties with the same number of bedrooms, dining rooms, bathrooms and living areas.
  • Exterior – outside features should be similar, for example, both should have a garage or the same number of parking spaces
  • Condition – compare properties that are in a similar condition to the one you are interested in.

Tune into the market

Property market conditions can change fast, so it’s important to keep abreast of what’s going on. A sale price from even a few months ago may no longer be relevant if conditions have changed.

One way to keep on top of local market conditions is to go to plenty of inspections and auctions. You might even like to befriend a few local real estate agents and ask them to keep you in the loop about upcoming opportunities.

It’s also a good idea to keep track of:

  • Clearance rates (the percentage of properties sold at auction – a good indicator of demand)
  • Days on market (how many days it takes for a property to sell)
  • Median price (the midway point of all properties sold at market price over a set period).

Don’t take the advertised price as gospel

Remember, the advertised price is a guide only. This price can also change during the marketing campaign, based on comparable sales, market conditions and if any offers are rejected by the vendor.

Don’t be afraid to check with the agent whether the advertised price has changed.

Want to hear the good news?

You don’t need to spend countless hours researching – we’re here to help.

We offer a range of free property market reports to help get you up to speed with everything from the estimated price range of a particular property to local suburb information.

Get in touch today to find out more.