Want to invest in high-yielding properties? Look up to regional QLD

Want to invest in high-yielding properties? Look up to regional QLD

Savvy property investors may want to look towards regional Queensland to park their cash in, with country towns in the state leading rental returns across Australia.

Nearly half of the top 100 highest yielding suburbs in the country are in regional Queensland, according to CoreLogic’s latest Top Rental Performers Report.

Rental yield is the annual return of a property indicated as a percentage of the property’s value; the higher the yield, the more of your investment you’re potentially earning back.

The small coal mining town of Blackwater in central Queensland takes the top gong nationally, generating rental returns of 11.7 per cent. Investors looking to buy there would need to fork out a median property value of $127,000, while the median weekly rent is $250, figures from REA Group show.

The average investor buying in Blackwater can expect to make monthly repayments of about $575, according to data from RateCity, which would be well below the rental income the property could produce, making it a cash flow-positive asset.

Coming in third place was the Cairns suburb of Woree, which yields 10.8 per cent on an average property. For someone investing here, the median property value is much steeper at $320,000 while median weekly rents are $350.

In contrast to Blackwater, monthly repayments of $1449 would likely make it a negatively geared asset, where the property is costing more to own and maintain compared with the rent it can earn.

Other regional towns in Queensland that made the list include Manunda in Cairns, where properties yield 9.5 per cent, and Bungalow, also in Cairns, where investors can expect to pocket back as much as 8.7 per cent a year.

In comparison, rental yields in Sydney and Melbourne are much sharper at 3.5 per cent and 3.6 per cent respectively, according to research by CoreLogic.

Many investors seem to have spotted an opportunity, with investor housing finance commitments surging by 13.1 per cent in July 2019 according to recent CoreLogic data, the highest the numbers have been since November 2018.

 

Suburb Median property value Loan amount Monthly repayment (P&I) Median weekly rental

Cash flow positive/negative

Yield
Blackwater $127,000 $114,300 $575.07 $250 P - $424.93 11.7%
Woree $320,000 $288,000 $1,449 $350 N - $49 10.8%
Manunda $346,750 $312,075 $1,570.13 $350 N - $170.13 9.5%
Bungalow $324,500 $292,050 $1,469.38 $378 P - $42.62 8.7%

*median property values and rental data from REA Group
*based on a 90% LVR with a loan term of 30 years on a 4.44% interest rate, data from RateCity.

 

But investors should keep in mind that these types of properties generally tend to be located in remote areas, which may make the home harder to resell.

And the capital growth of real estate in regional areas in any state is generally much slower than in capital cities such as Sydney and Melbourne, which have seen gains of 19.4 per cent and 23.5 per cent in the past five years.

High yielding properties may suit investors seeking to pursue a positive gearing investment strategy. In fact, with the official Reserve Bank of Australia cash rate at a historical low of 1 per cent, this can be an attractive path for some people looking for an investment that, essentially, makes a profit.

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Learn more about home loans

What is a loan-to-value ratio (LVR)?

A loan-to-value ratio (otherwise known as a Loan to Valuation Ratio or LVR), is a calculation lenders make to work out the value of your loan versus the value of your property, expressed as a percentage.   Lenders use this calculation to help assess your suitability for a home loan, and whether you need to pay lender’s mortgage insurance (LMI). As a general rule, most banks will require you to pay LMI if your loan-to-value ratio is 80 per cent or more.   LVR is worked out by dividing the loan amount by the value of the property. If you are looking for a quick ball-park estimate of LVR, the size of your deposit is a good indicator as it is directly proportionate to your LVR. For instance, a loan with an LVR of 80 per cent requires a deposit of 20 per cent, while a 90 per cent LVR requires 10 per cent down payment. 

LOAN AMOUNT / PROPERTY VALUE = LVR%

While this all sounds simple enough, it is worth doing a more accurate calculation of LVR before you commit to buying a place as there are some traps to be aware of. Firstly, the ‘loan amount’ is the price you paid for the property plus additional costs such as stamp duty and legal fees, minus your deposit amount. Secondly, the ‘property value’ is determined by your lender’s valuation of the property, not the price you paid for it, and sometimes these can differ so where possible, try and get your bank to evaluate the property before you put in an offer.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

How much can I borrow with a guaranteed home loan?

Some lenders will allow you to borrow 100 per cent of the value of the property with a guaranteed home loan. For that to happen, the lender would have to feel confident in your ability to pay off the mortgage and in the security provided by your guarantor.

Mortgage Calculator, Property Value

An estimate of how much your desired property is worth. 

Does Australia have no-deposit home loans?

Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.

However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.

Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.

How much debt is too much?

A home loan is considered to be too large when the monthly repayments exceed 30 per cent of your pre-tax income. Anything over this threshold is officially known as ‘mortgage stress’ – and for good reason – it can seriously affect your lifestyle and your actual stress levels.

The best way to avoid mortgage stress is by factoring in a sizeable buffer of at least 2 – 3 per cent. If this then tips you over into the mortgage stress category, then it’s likely you’re taking on too much debt.

If you’re wondering if this kind of buffer is really necessary, consider this: historically, the average interest rate is around 7 per cent, so the chances of your 30 year loan spending half of its time above this rate is entirely plausible – and that’s before you’ve even factored in any of life’s emergencies such as the loss of one income or the arrival of a new family member.

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

Is there a limit to how many times I can refinance?

There is no set limit to how many times you are allowed to refinance. Some surveyed RateCity users have refinanced up to three times.

However, if you refinance several times in short succession, it could affect your credit score. Lenders assess your credit score when you apply for new loans, so if you end up with bad credit, you may not be able to refinance if and when you really need to.

Before refinancing multiple times, consider getting a copy of your credit report and ensure your credit history is in good shape for future refinances.

I have a poor credit rating. Am I still able to get a mortgage?

Some lenders still allow you to apply for a home loan if you have impaired credit. However, you may pay a slightly higher interest rate and/or higher fees. This is to help offset the higher risk that you may default on your repayments.

I can't pick a loan. Should I apply to multiple lenders?

Applying for home loans with multiple lenders at once can affect your credit history, as multiple loan applications in short succession can make you look like a risky borrower. Comparing home loans from different lenders, assessing their features and benefits, and making one application to a preferred lender may help to improve your chances of success