Interest rates right now are low, but does this necessarily mean you should buy an investment
take a look at a home loan comparison website, you’ll see a growing
number of variable rate mortgages are now below 4%.
Yellow Brick Road Castle Hill we know that with mortgages this
affordable you could refinance out of an old expensive loan and into a low cost
one; and it’s also a good opportunity to repay more than you have to – to build
up equity more quickly.
But a lot of people
are asking if the low rates mean it’s time to buy an investment property?
Firstly, I suggest that potential investors separate their thinking
between the mortgage interest rates and the investment itself. Long after
variable rates have returned to normal levels, you’ll probably still own this
investment and it should make financial sense.
The point of an investment property is to harvest the ‘total
gross yield’ – that is, you want the property to produce rental income and
capital growth. The goal
is to have enough rental income to help pay the mortgage and meet costs
month-to-month, as well as
have sufficient capital growth so that over time your property becomes one of your most valuable assets.
If you can achieve a 5% per annum rental yield and the
average growth in the suburb is 3% per annum, you have an 8% gross yield. But
there are many things that can vary this result. Will
the property need renovations? Is it maintenance-intensive? Will you use a
property manager? Is it close to amenities such as schools, shops and train
stations and likely to be sough-after by tenants? At the end of the day these things will affect
your yield over the long term, and remember, property is always a long-term game, so you’re never going to make millions overnight.
There’s really no
substitute for homework – you must have a clear view about ownership costs.
You also have to think about negative gearing, which is a
tax rule that allows you to take any losses on the property and use them to
reduce your taxable income, thereby reducing your taxes. nThis brings us to the cost of your mortgage. Many people
want to buy an investment property simply because they can, but the cost of
entry isn’t the end of the discussion.
The investment mortgage has to be repaid from income, while
most people are also funding the family home loan from the same income. Even if
negative gearing gives you a small tax break, you have to calculate if you
could afford to pay the investment property mortgage if the rates moved upwards
by, say, 2%, or 3%. Not
sure how this impacts your situation? Talk to your local Yellow Brick Road Castle
Hill mortgage broker today. We can easily crunch the numbers and help you find
the best loan on the market.
Fixed rate mortgages only give you breathing room for the
term of the fixed rate – they don’t make rising interest rates go away. Low interest rates make it affordable to buy, but you have
to know what it costs to own it, which means understanding where interest rate
rises will leave you.
And, a final hint: the best property investments are made at
purchase. Try to buy a property at a good price, with low maintenance, in a
high-demand area, where prices are just starting to pick up. Be patient and do
your homework. If you have
any difficulty you can always make an appointment to speak with one of our friendly
mortgage brokers at our Yellow Brick Road Castle Hill Branch.
If you buy well, you’ll do well.