September 9, 2009
It’s official. Investors are returning to the residential property market and they’re looking for houses and mortgages that represent superior value for money.
According to the Reserve Bank total lending on investment housing climbed back to around $5.9 billion in both May and June after bottoming at $4.98 billion last November.
Is it the right time to buy?
There are some strong indicators that it’s a good time to buy your first investment property. The end of the First Home Owners’ Boost means activity at the lower end of the market is expected to settle down, bringing buying opportunities for investors.
Interest rates (although expected to go up) are still at historical lows so an investment property is still relatively cheap to finance.
Rents have been increasing for the past two to three years and a shortage of housing stock suggests they will continue to rise.
So if you have good equity in your home, employment security and enough excess income to service repayments, a mortgage on an investment property can give you the opportunity to earn regular income from rent and generate healthy long-term capital gains.
Which type of loan?
Lenders have certainly toughened up their rules for investors during the past year. You’ll need at least a 20 percent deposit if the only security is the house you’re buying.
You will have to prove you can service the loan and that the property has a strong rental history.
Loans labelled “investor” often don’t vary much from standard variable loan offering but repayment options can vary.
For example, the RAMS interest only maximiser requires you to make interest-only repayments for the first five years and if you are prepared to offer another property as additional security you can borrow 100 percent of the investment property’s value.
Seek independent advice before deciding on the best loan structure for your circumstances: interest only, principal and interest, fixed or variable interest rates.
There are over 130 variable rate investment mortgages currently available at RateCity. Advertised interest rates vary from as low as 4.79 percent up to 7.34 percent p.a.
Most allow you to make either interest-only or principal and interest repayments. Upfront costs range from nil up to $1,102.50. Some have ongoing fees charged on either a monthly or annual basis.
The 100 percent offset accounts are usually not available with these investor loans but most still allow you to make additional repayments and split your loan between fixed and variable, just like a mortgage on your own home.
Compare the total repayments over the life of each loan to find the one that represents the best value for money. For example, a 25-year investment loan for $275,000 from the State Custodians with a 4.85 percent p.a. comparison rate would cost $475,105 in total repayments.
By comparison a typical standard variable loan with a comparison rate of 6.05 percent p.a. would cost $534,073 in total repayments. The high end of the market at 6.47 percent p.a. would incur total repayments of $555,500. That’s over $80,000 more expensive that the State Custodians rate.
There are many indicators that show it is currently a good time to purchase an investment property. The key to making such a purchase a successful investment strategy is to find the property with the best potential for rental returns and capital growth and to combine that with an investment mortgage that represents the best value for money available.