Liar Liar, Property Market on Fire!!!

The RBA lied to you.

The RBA told us they would not be raising rates until at least 2024. Lie!

The RBA told us they would wait for the May and June wages data before increasing rates. Lie!

Well, at the last RBA meeting they did something this country has not seen since November 2010….raising interest rates.
The official RBA rate moved from a record all-time low of 0.1% upwards by 0.25% to 0.35%. The media is having a field day right now, blasting the news with fear around the terrible news of interest rate increases.

But why? Why are higher interest rates a sign of Armageddon?

Higher interest rates are in fact a sign of a strong economy. Rates fall or stay low when the economy is weak. Rates rise when the economy is strong, and that growth threatens to raise inflation- which is where we are at right now. Look around, the economy is doing seriously well right now. Do you know anyone who has been laid off from work and lost their job? I certainly don’t. In fact, all the employers I talk with each week are complaining they can’t find staff!

 

 

So, should you be scared of the rate hikes?

The recent 18 months of property growth around the country have absolutely been driven by FOMO. (Fear of Missing Out.) As buyers took advantage of all-time low-interest rates and easy access to debt to pay way more than they should have to purchase the property.

In our view, the Sydney property market hit its peak in November last year, and since then the heat has absolutely come out of the market.

Throw in an increase of properties on the market, and fear of huge interest rate rises and we are starting to see vendors gripped by FONGO. (Fear of Not Getting Out.)

The million-dollar question is … how far will the property market drop?

No one knows the answer to that question of course. And our guess is just that, a guess.

But here is one thing we are certain about: There is zero precedent for the RBA to continue hiking rates up whilst house prices are materially falling. The last thing the RBA wants to do is tip us into a recession that would deny workers their jobs and wage growth that the RBA has spent the last 12 years trying to stimulate.

So talk of home loan rates going 6-10% is absolute trash in our view, but you must admit it does make for great headlines and clickbait. Just like “Liar Liar, property market on Fire!!!”

 

4 Property Investment Mistakes to Avoid

Learning how to invest in property like a pro takes time, and if you’re new to the game, it’s easy to make rookie errors.

Here are 4 common mistakes to avoid when buying your first investment property.

Poor cash-flow management

As a first-time property investor, it’s important to have a solid understanding of both the initial purchasing costs you’ll be up for, as well as the ongoing costs of maintaining an investment property.

Examples of ongoing costs may include council rates, water bills, land taxes, body corporate fees, property management fees and insurance. You should also factor in contingency funds for things like repairs and maintenance.

Before you go ahead and purchase, do up a budget and include all of these types of expenses. Better yet, speak to us and we’ll help you create a budget and plan accordingly.

Falling for an inflated rental guarantee

A rental guarantee is when a vendor or developer guarantees a certain rental income for a set period. Sounds peachy, right? Not always.

The problem with these is that the price of the rental guarantee is often built into the purchase price. So, in effect you may be paying for the guaranteed rent yourself via an inflated purchase price.

The guaranteed rent may also be at above market rates to make it sound more enticing. However, when the contract is up, you’ll be left with a lower rental return – or maybe no rent at all.

Meanwhile, lenders may use the market rent, rather than the guaranteed rent, when assessing your eligibility for a loan.

To avoid falling into a rental guarantee pitfall, it’s important to do your own research thoroughly – don’t just take the vendor’s word for it.

Buying risky off-the-plan purchases 

Buying off the plan works for some investors, but it can be risky. For one, the developer may not construct the property on time or at all, or they may deliver something sub-standard.

Another potential problem with buying off the plan is that you can run into issues with securing finance. Some lenders may offer conditional approval (finance in principle) for off-the-plan purchases before construction starts, but they won’t actually loan you the money until the property has been constructed and they have performed a valuation on the finished product.

At this point, the property may not be valued by the lender at the price you’ve agreed to pay once it is completed. This can make it difficult to secure the finance you need to complete the sale, which may cause you to lose your deposit, or you may have to sell it quickly at a loss.

Your financial position and ability to service the loan could also change drastically between the time you agree to buy, and when you actually purchase the property. There may be market falls and interest rate rises (as we’ve seen recently) that could affect your borrowing ability.

Thinking you can do it alone

As a first-time investor, understanding all the ins and outs of buying a property can be tricky. From finding the right property to suit your investment goals to securing a home loan meets your specific needs, the process can be a bit of a minefield.

That’s where we can help. A mortgage broker will do the hard yards for you, from explaining your borrowing capacity and creating a purchasing budget, to providing expert advice about the right loan product and structure for your specific investment strategy, financial situation and goals.

To get started on your property investment journey, get in touch. We’re here to help.

Pre-tax Time Checklist for Property Investors

If you’re like most property investors, trawling through boxes of receipts to tally up your allowable deductions is probably not your idea of fun. So, how can you make tax time a little easier?

Here’s our pre-tax time checklist.

1. Gather all your documents in one place

The earlier you get organised, the less painful tax time will be.

To get started, gather up all the paperwork your accountant may need, from private health insurance info to rental income statements.

If you haven’t already been storing your receipts electronically, now is the time to change that. There are loads of apps and tools to digitise your receipts, so that they are all ready to go come tax time next financial year. Tracking your spending is also a great way to take control of your money.

Keep in mind the ATO still recommends you keep a back-up of all your digital records.

2. Tally up your allowable deductions

There are all sorts of deductions you may be able to claim on your tax return. Head on over to the ATO website to find out more.

If, like many Aussies, you had to work remotely last year, there may be good news for you. There are various home expenses you may be able to claim.

Investment properties owners can also claim expenses such as advertising for tenants, council rates, water bills, maintenance and loads more. The ATO website has more details.

The ATO’s Guide for rental property owners, Rental properties 2021, may also be useful in helping you to understand tax deductions for property investors.

3. Determine your assessable income

Assessable income can come from a range of different sources. Examples include salary and wages, allowances, interest from bank accounts, dividends and other income from investments, bonuses and overtime payments, commissions, pensions and rent.

It’s a good idea to make note of all your assessable income and your allowable deductions in a spreadsheet or similar online tool, so that it’s in one easy location for your accountant.

4. Book in with your accountant

At this time of year, accountants are more popular than ice-cream on a 34-degree day. A word to the wise: book in early.

And if you’re thinking of doing your tax on your own, we’d recommend you reconsider. A tax accountant is an expert who can help save you time and money, as they’ll know exactly what deductions you qualify for and ensure nothing gets missed.

5. Review your finances and plan for the year ahead

You’re in the thick of going through your finances now, so you may as well review them and plan for the year ahead.

If you haven’t given your loan a health-check in a while, speak to us and we’ll make sure your mortgage is still right for your needs.

Think about how you’d do things differently in the new financial year. Maybe you’d like to start a savings plan using an offset account or redraw facility for a big-ticket purchase like another investment property?

Perhaps you could tackle your debt or use your equity to build your investment property portfolio.

Whatever your financial goals are, we are here to help you achieve them. Get in touch today.

Understanding the Cash Rate increase

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 per cent.

This is big news as the official cash rate has been at a record low of 0.1 per cent 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 per cent). 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 are a homeowner who purchased a property for the price of $999,037 with a 20% deposit. Your monthly repayments might jump from $3,365 to $3,765 if the cash rate were to hit 1 per cent and your interest rate increased from 2.99 per cent to 3.89 per cent. That is an increase in repayments of $400 a month.

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

Region Median House Price Loan amount (20% deposit) Monthly repayments at 2.99% Monthly Repayment at 3.89% Increase in payment Increased 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 per cent 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 per cent.

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.