Finance advice

Property investors at risk of mortgage default

By James Mitchell

Moody’s Investors Service has warned that rate hikes will put investor mortgages at risk of default, at a time of record low rental yields and the deteriorating affordability of servicing investment properties. 

In a research report published this week, Moody’s noted that rental yields on houses in Australia’s two biggest cities, Sydney and Melbourne, have declined to record low levels. 

“As a result, the net costs involved in servicing a housing investment (investment loans costs less rental income) have increased relative to household incomes, making investment properties less affordable,” the report said. 

The report highlighted that low rental yields, combined with deteriorating affordability, “increase the risks and default probability for Australian residential property investors and therefore for Australian RMBS backed by loans on residential investment properties.”

Meanwhile, the affordability of servicing properties is now at its worst levels on record, according to the report. 

“The affordability of residential investment property – defined as the net cost of servicing a residential property investment as a percentage of net household income – is at the worst level on record for investments in houses in Sydney and houses and apartments in Melbourne, and the worst in 10 years for investments in Sydney apartments,” it said. 

Moody’s calculated that investors in Sydney houses require 39.6 per cent of net household income to service their investment properties, while Melbourne house investors require 26.5 per cent, both record highs.

“The deterioration in the affordability of servicing investment properties makes residential property investors more vulnerable to risks such as loss of income, interest rate increases, vacancies or rent reductions,” the report said. 

“Should an investor suffer a loss of income, the higher cost of servicing their investment property will diminish any savings they may have at a faster rate, leaving the investor with less time and flexibility to recover and therefore increasing the probability of them defaulting on their loan.”

The warning comes as the market prepares for further out-of-cycle rate hikes, which will put even more pressure on those servicing mortgages. The Bank of Queensland will raise its variable rates on Friday, with many predicting more banks will follow. 

“Any increase in interest rates, vacancy or loss of rental income will make investment properties even less affordable and increase the probability of investors defaulting on their mortgage loans,” according to Moody’s. 

As an example, the report outlined that if mortgage interest rates were to increase from the current average of 5.95 per cent to 7 per cent (the average for the past 10 years) the net servicing cost for an average residential property investment in Sydney and Melbourne would increase by approximately $5,000 a year, or approximately 5 per cent of net household income. 

“The same increase in interest rates three years ago would only have resulted in an increase of $3,500 in net servicing cost,” the report said. 

“The decline in the affordability of servicing investment properties also reduces investors’ flexibility around refinancing or restructuring their mortgage loan terms, giving them less options should they experience hardship and therefore increasing their likelihood of default.”

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podcast

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Tune in to the latest episode of Property Showcase, the podcast with the inside track on the products and businesses that will help turbocharge your portfolio, maximise returns and make your overall investment experience seamless and stress-free!

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To hear more about these services, make sure to tune into this episode of Property Showcase!

 Make sure you never miss an episode by subscribing to us now on iTunes!

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Many investors who would have been successfully approved for finance last year are struggling now to either begin or continue their property investment journey because of the current financial climate.

In this episode of the Smart Property Investment Show, broker John Manciamelli and Momentum Media director Alex Whitlock joins host Tim Neary to discuss how APRA changes and the royal commission have resulted in a tighter lending economy and what that means for Australian investors.

They discuss what traps investors should avoid if they are trying to obtain finance, the four key growth drivers in a property market and unpacking trust structures while revealing one type of trust that you should miss.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

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When buying property, it’s important to focus on what’s important. Investor Katarina Taurian shares just what exactly is important to her: having the mindset of looking past superficial cosmetic matters and homing in on the structural suitability and potential of a property.

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In this episode of the Smart Property Investment Show, Katarina joins host Tim Neary to unpack her entry into the property market and experiences of rentvesting, and how the Smart Property Investment Show was vital  in a number of decisions which she made along the way.

Katarina discusses about the team that she had help her along the way, why she thinks that you should never skimp on a good solicitor and accountant, and the red flags which tell her why buying a new property doesn’t necessarily mean buying a better property.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

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More than just bricks and mortar, experts often regard property investment as a ‘game of finance’. As such, a good finance strategy can lead any investor to success.

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Why buying new property doesn’t mean buying better property

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