Investors take advantage of rate hikes

Investors take advantage of rate hikes

As interest rates rise, home buyers are taking a back seat with applying for home loans and investors are back in the game. RateCity reports on the good and the ugly side of investment loans.

April 27, 2010

The number of investor home loans is on the rise with a 21 percent increase recorded in February of $6.40 billion compared to $5.07 billion in February 2009, according to Reserve Bank of Australia data. Even though the February figure is less than that of the month prior by $73 million, owner-occupied home loans have fallen by 10 percent since February 2009, which shows a growing demand for investment property.

Increased confidence in the market
The financial crisis caused uncertainty of the risk for both buying property and borrowing from lenders with home buyers and investors alike sitting on the fence waiting for a safer time.

Since February 2009, financial markets have slowly improved and investors are finally making a comeback. With the recent spout of rate hikes, home buyers are being put off from purchasing homes and the first home buyer market has dropped after incentives were cut, but investors have more confidence in the market, with many seeing this as an opportunity as they borrow more, hence the increase in the take-up of investment home loans.

As interest rates rise many home buyers are turned off purchasing new homes and investors are seeing this as an opportunity as the demand for rentals is increasing,” says Damian Smith, RateCity’s CEO.

“This new wave of investors must be careful when choosing an investment home loan because your mortgage deal can be the difference in making a good return on your purchase.”

Get the most out of your investment loan
If you are in the market for an investment property, here are some tips on what to look out for when choosing an investment loan:

Interest rates: When rates were lower investors were more commonly choosing a fixed rate because it is helpful to manage expenses with a set repayment. But with the current market of competitive variable rates, more are choosing variable. To find a home loan with a great interest rate, compare online at RateCity.

Construction loans: A construction loan is great for borrowers financing a building project or planning to renovate before reselling. Unlike other loans where you can access all of your funds, a construction loan can provide smaller lump-sum payments during various stages of the property being built. That way you aren’t paying the builder for the work they have not yet completed.

Interest-only loans: This type of loan could suit short-term investors as you pay only the interest. When you choose to pay out the loan usually after selling, you then pay the balance as a lump sum.
This type of loan allows investors to purchase property with a limited cash outlay and investors may receive tax benefits through negative gearing. It is also helpful to manage expenses with a set repayment. This is not recommended for long-term property investors because you are essentially relying on the value of the property to increase faster than how much you have paid in interest.

Mortgage portability: This is the ability to transfer your loan to another property. A portable home loan allows you to sell one property and move it to a new one without having to refinance, which may save you on legal and application fees.

 

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Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

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Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time. 

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An complaints officer – previously referred to as an ombudsman -looks at formal complaints from customers about their credit providers, and helps to find a fair and independent solution to these problems.

These services are handled by the Australian Financial Complaints Authority, a non-profit government organisation that addresses and resolves financial disputes between customers and financial service providers.

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The money you pay back to your lender at regular intervals. 

Why is it important to get the most up-to-date information?

The mortgage market changes constantly. Every week, new products get launched and existing products get tweaked. Yet many ratings and awards systems rank products annually or biannually.

We update our product data as soon as possible when lenders make changes, so if a bank hikes its interest rates or changes its product, the system will quickly re-evaluate it.

Nobody wants to read a weather forecast that is six months old, and the same is true for home loan comparisons.

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Also known as the comparison rate, or sometimes the ‘true rate’ of a loan, the average annual percentage rate (AAPR) is used to indicate the overall cost of a loan after considering all the fees, charges and other factors, such as introductory offers and honeymoon rates.

The AAPR is calculated based on a standardised loan amount and loan term, and doesn’t include any extra non-standard charges.

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How is the flexibility score calculated?

Points are awarded for different features. More important features get more points. The points are then added up and indexed into a score from 0 to 5.

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The amount you currently owe your mortgage lender. If you are not sure, enter your best estimate.

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How often you wish to pay back your lender. 

What is a specialist lender?

Specialist lenders, also known as non-conforming lenders, are lenders that offer mortgages to ‘non-vanilla’ borrowers who struggle to get finance at mainstream banks.

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Savings over

Select a number of years to see how much money you can save with different home loans over time.

e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.

Does Real Time Ratings' work for people who already have a home loan?

Yes. If you already have a mortgage you can use Real Time RatingsTM to compare your loan against the rest of the market. And if your rate changes, you can come back and check whether your loan is still competitive. If it isn’t, you’ll get the ammunition you need to negotiate a rate cut with your lender, or the resources to help you switch to a better lender.