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Post-rate mortem: How savvy investors are navigating higher rates
Another rate hike has put investors’ borrowing power under pressure, but a lender price war, alternative loan structures and untapped equity could unlock their next property deal before Christmas. Here is how savvy investors manage higher rates.
As higher interest rates squeeze borrowing capacity and increase holding costs, investors are being encouraged to look beyond the major banks and seek out alternative lending arrangements.
Last week, the Reserve Bank of Australia (RBA) lifted the cash rate by 0.25 percentage points to 4.85 per cent, amid already-squeezed borrowing capacity and market uncertainty.
According to Fouracre Financial founder Jack Fouracre, the recent rate rise reduced borrowing power by 2–3 per cent, around $20,000 to $50,000, depending on how much lending investors had.
Fouracre said investors should review their lending options, with flexible lending policies and equity-release strategies that enable alternative ways to secure finance and manage cash flow.
“For most people, that’s not really going to push you to a third-tier lender or cause anything major, but if it pushes you to a third-tier lender, it’s not something you can avoid,” he said.
Take advantage of lender ‘price wars’
As investor lending continues to contract, smaller lenders are stepping up competition for borrowers, creating opportunities for investors to secure more favourable loan terms and improve their borrowing capacity.
Recent data showed total investor mortgage lodgements had fallen by 44 per cent since the end of January, prompting non-major banks to compete more aggressively for a shrinking pool of borrowers.
Similarly, the big four recorded lending volume declines of 26–27 per cent over the last quarter.
Fouracre said the shift was driving a “price war”, with smaller and non-bank lenders offering increasingly competitive rates.
“The third-tier lenders and non-bank lenders, there’s still pretty competitive rates out there and because of the drop in investor lending it’s moving towards the third tiers more and more,” Fouracre said.
InvestorKit founder Arjun Paliwal said that investors should look beyond interest rates when comparing lenders, with loan policies also playing a key role in determining how much they could borrow.
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“Interest rates will help you get money cheaper, but interest rates with the right bank and policy will equal not only cheaper, but unlock the next layer of lending,” he said.
Paliwal said that options such as 40-year loan terms and interest-only arrangements could help investors access additional borrowing capacity.
For investors who had reached their borrowing limits with major banks, Fouracre pointed to lenders such as AMP, which offered 40-year loan terms and minimum six-year interest-only periods.
He said the longer assessment period could improve borrowing capacity compared with the 25-year principal-and-interest assessments commonly used by major banks.
“You can [also] go up to 10 years for interest-only. But as a minimum, even if you do the six years, the way that it’s being assessed is quite good, especially if you have a large portfolio,” he said.
Use buffer-based lending
Beyond seeking competitive rates and policies, Fouracre also urged investors to consider buffer-based lending, allowing them to draw on property equity to build cash flow and cover mortgage shortfalls.
“Say you access $150,000 [in equity], you can use that money to make repayments on the debt that’s associated with the property, as long as it’s receiving rental income from that same property,” he said.
Fouracre said investors with three or four properties could use the equity to cover cash flow shortfalls on their investment loans for four to five years, after accounting for rental income.
“All the while that’s happening, your personal income, your wages that you’re getting or what you’re paying yourself, is just going towards your personal buffers, like offsetting your own occupied home loan.
“So it helps you repay your debt quicker, but it also just could relieve pressure.”
Paliwal said accessing equity could give investors a financial buffer to manage higher mortgage costs and hold their properties until market conditions improve, rather than being forced to sell under pressure.
He said that if an investor’s monthly cash flow shortfall increased from $1,000 to $2,500 because of higher interest rates, the investor could release $100,000 in equity to cover the additional $1,500 per month.
“By releasing $100,000 in equity, you could create a buffer to cover that additional cost for five years,” he said.
As a result, Paliwal said investors can put their existing cash towards another property deposit, rather than directing it towards higher mortgage repayments.
However, as a potential drawback, he said the property would need to grow by more than $100,000 over five years for the investor to truly benefit, and to stretch their cash flow beyond what it previously was.
Buy before Christmas
Despite the latest rate hike, Paliwal encouraged investors to purchase their next deal before Christmas, while plenty of listings were still on the market before the holiday season.
“You should try to secure a property in November. That’s the time when listings are coming on and piling on,” he said.
He also said that as prices fell, investors should take advantage of properties providing solid returns in the current market, with some dwellings seeing yields increase by 0.3–0.5 per cent overnight.
“You can lock it in for life because you can buy them at that price and the rents are there - rents only go up,” he said.
Further, Paliwal said the next month was an opportune window, as buyers often became increasingly nervous after interest rate rises, reducing competition at open homes.
“We’ve seen it: application volumes, inquiries, things start shifting a bit because people are nervous and it always ends up being the best time,” he said.
“So this is the time to get your finances locked in because these next three months are going to be ones where a year from now you can look back and be like, ‘I can’t believe I got a deal like that’.”
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