With the cost of mortgages expected to fall even further after interest rates plummeted to a historic low in February, it is not surprising that real estate has become the most attractive investment for 2015.
Blogger: Richard Symes, CEO, Credit Repair Australia
CommSec chief economist Craig James said the new interest rates are providing Australians with "the best borrowing conditions they have ever seen". If, as predicted by many economists, rates fall another one percentage point in coming months, this would take them to their lowest in over 40 years.
Lower interest rates make it cheaper to borrow, which encourages spending and investment. A fall in interest rates reduces the monthly cost of mortgage repayments, leaving householders with more disposable income. Buying a property to rent is the most popular form of investment because it can be less volatile than shares or other investments.
However, if you take out a loan to purchase an investment property, remember, it’s likely that rates will rise again in the future. Planning as if low interest rates would last forever carries its own risks. For most people, a rise in interest rates will mean increased repayments on mortgages, power and phone bills, credit cards and other loans. If you start running behind with bills and are unable to make repayments, this may result in a black mark against your credit report, or you may end up with significant debt problems.
Property investment isn’t an instant road to riches and there are a number of factors to consider before doing so:
1. Check your credit report
The first step towards owning your investment property is getting approved for finance. To get approved, your lender will look at your credit report to assign you a credit rating. A good credit rating means you can access more home loan options and your interest rates could be lower, possibly saving you thousands. You can get a copy of your credit report by contacting Credit Repair Australia or through the Credit Reporting Agencies, such as, Veda Advantage and Dunn & Bradstreet.
2. Develop a budget for the future
Think about the income you expect to receive from the investment property and the expenses associated to it. Buying, selling and managing an investment property will have an impact on your overall return. Think of factors likely to occur (such as an increase in interest rates, if you are planning to start a family, etc.) and whether you can cover any shortfall in the mid to long term. Also consider whether you could cover all expenses short term if you had no tenants for a while.
3. Negative equity
Consider how long you will keep the investment property. If circumstances changed and you had to sell the investment in a hurry, you may not obtain a positive return out of it. If the value of the property goes down you could end up owing more than the property is worth.
Buying an investment property continues to be one of Australia’s favourite ways to invest their money. It’s not easy to buy your first investment property, but when done well, it can create long-term wealth for you and your family.