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Property investors are set to feel financial pains by the big banks to further increase interest rates for interest-only loans, but this can be avoided through depreciation, according to the managing director of a tax depreciation company.
With recent interest rate rises for interest-only loans, which include NAB with a 0.35 per cent increase to 6.25 per cent, Westpac with a 0.34 per cent increase to 6.30 per cent, while ANZ led the charge earlier in the month with a 0.3 per cent increase to 6.26 per cent, the recent building boom has put investors under pressure.
“With borrowing costs for investors now above 6 per cent, these latest increases in interest rates will certainly put financial pressure on many property investors who will now face cash flow problems,” Paul Bennion of DEPPRO said.
“In particular, property investors who paid large sums of money for homes over the past year in Sydney and Melbourne will be most under pressure.
“The capacity of investors to boost cash flow through increasing weekly rents is limited by the fact that rental returns are low and also by the growing supply of new rental accommodation in many capital cities.”
Mr Bennion said that with lowered rental yields, investors will need to find alternatives to increase their cash flow.
He suggests they utilise every possible tax benefit available to them, which DEPPRO estimates is an avenue not many investors take, with only one in five investors following up on all potential tax depreciation entitlements.
“Investors fail to understand that the tax benefits from depreciation can be just as important as rental income and that tax benefits obtained through depreciation can be equivalent to 60 per cent of the total purchase price of the property,” Mr Bennion said.
“Property investors who have a portfolio of investment properties should also realise that they can claim tax depreciation benefits retrospectively if they have not done so in the past.”
Repayments Loan Calculator can be used to estimate your mortgage repayments by using the length of the loan term, interest rate, and LVR.
Depreciation is defined as the decline in the value of an asset.
Interest is the amount of money charged by a lender or financial institution for a loan, which is calculated as the percentage of the principal amount paid over the loan term.