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The Experts

New mortgage season, new rules

Andrew Willink - Finance Expert
Friday, November 06, 2009

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In the new interest rate season following the first hikes to the official cash rate since March 2008, Australians will need to adjust to fresh surroundings if they are going to enjoy its fruits.

The first sign of change is the decline of first homebuyers, who have taken a few steps back to make more room for a returning breed of home owners – the investors.

In just two months, the number of owner occupied housing loans has fallen from its June peak of 65,151 to only 62,718 in August – a drop of 3.73 per cent according to the Australian Bureau of Statistics. The value of owner occupied housing loans has fallen by 4.25 per cent in the same period. While this has been happening, the value of investment housing loans has increased by 6.1 per cent.

Of all the new home loans in August, only 24.7 per cent were taken out by first homebuyers, a drop from 27.1 per cent in June. This will be unsurprising to some, as the benefits of the First Home Owners Boosts have begun to wane.

While interest rates are still relatively low, property returns remain attractive compared to keeping cash in the bank. And the outlook is set for even greater returns according to some experts.

Research from BIS Shrapnel has predicted that house prices will rise by 20 per cent over the next three years, due to our ballooning population and shortage of housing supply.

So how can you use investment loans to grow your wealth?

Let’s take Joel, who plans to invest in a $375,000 property and needs a $300,000 loan. If he chooses a three-year fixed interest-only investment loan with the average rate of 7.25 per cent p.a., the total repayments after three years would cost Joel $65,250.

For this scenario, if we ignore other fees like stamp duty, legal costs and tax calculations, but include a rental income of $400 a week, this would total after three years $57,600.

By subtracting Joel’s rental income from his repayment costs, he would have paid $7,650 in expenses after three years.

If BIS Shrapnel’s estimation is correct then Joel can sell his property for $450,000 in three years. That means Joel would have earned $67,350 in just three years – not a bad result.

As the market winds change direction, we need to replan our money-making tactics. You don’t want to waste all your energy fighting the gales – learn about unfamiliar products and rates, and let the natural forces carry you and your wealth to dizzying heights.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published: Friday, November 06, 2009

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