Note: If you would like to learn about the impact of low interest rates, you may prefer to watch this video instead.
Globally, we have are facing some challenging times. But it’s not all doom and gloom.
There is some good news worth sharing, in particular for investors. This unique situation we are all in has created some amazing opportunities.
Impact of low interest rates
Let’s first talk about what the impact is on our property market with regards to these record low interest rates. As you can see in the graph below, Currently we’re sitting at 0.25% in terms of the official cash rate
We’ve never experienced that in our history – that’s an incredible low. So what does that mean in terms of the banks? Currently the banks have also dropped their rates. ANZ currently has a rate of as little as 2.19% all right? Fixed for two years for owner occupiers. ING has an investment loan offering of 2.89% fixed for three years on an interest only loan. For a construction loan, your interest rates might be a little bit higher. But once you’ve completed construction you can lower those rates.
So what does that mean for you and other potential investors?
Client Case Study
A couple of weeks ago we had some clients reach out to us. They’d purchased a couple of properties last year. They were a couple with one child and a mortgage. They wanted to know how the current landscape would impact their portfolio moving forward.
Their first investment property was a townhouse in Brisbane, roughly 12 kilometers from the CBD. It was in an established area with very decent rental yields ($520 a week in rent) because Brisbane rental yields are typically higher than other cities.
They put in a cash deposit of 10%, using some of their shares to cover some of their deposits. We looked at then putting them on the lower rate. Currently they’re on 2.8% interest only. This means that they’re now receiving approximately $185 a week in cash flow positive income. That’s almost $10,000 a year. Over time, they can also expect to get some strong capital gains.
The second property is a 4 bedroom property in the Sunshine Coast. It rents for $525 a week. Again on the lower interest rate, this couple is looking at about $187 a week in cash flow positive income.
That’s 2 investment properties that are generating close to $20,000 a year. The other thing that we looked at too is their home, because they had a mortgage of $560,000. They were on a rate of 3.3% as you can see from the calculator below. We then brought that right back to the ANZ product 2.19% and we fixed that in.
In the past, client’s loan type (whether fixed or variable) depended on their situation. Now that interest rates are at a record lows, investors might want to consider fixing their rate. In the case of the aforementioned couple, adjusting the loan has saved them over $100,000 in interest and also reduced the loan term slightly.
Now let’s look at a situation where the couple don’t actually need the additional cash flows. They’re in a relatively good financial position. In this case, they can make additional repayments on their home loan. In doing so, the home loan repayments increase from $3000 to $4614. Over time, that leads to saving another $53,000. In total, the couple are now saving $155,000 on their mortgage and they’ve slashed the loan term from 22 years to 11. The two investment properties are now generating another $20,000.
For some people, this additional money will supplement their lifestyle. In our clients’ case, they put these additional funds into their home loan, which has now halved their loan term and saved them $155,000. This is a significant saving. The lowered interest rates has also improved this clients’ borrowing position, meaning they can now purchase another property.
We can all leverage off historically low interest rates by adopting a similar strategy. If you’re not sure exactly how this would work for you, speak to somebody who has property investment experience.
You can book in to a complimentary property and finance strategy here.