What low interest rates mean for positive property investors
In December, the Reserve Bank of Australia cut interest rates to 3 per cent following the fall in the iron ore price. It marked the fourth interest rate cut in less than a year and equals the lowest level ever set by the bank in 2009 at the height of the GFC.
The RBA said in a statement last week that while low rates have had some positive effects on the housing market – increases in building approvals, higher rental yields and improving house prices – economic growth as a whole is still below trend. It indicated that rates are likely to remain low for a while and could even drop a little further.
This is good news for positive property investors.
Interest rates have a big impact on whether a property is positively geared or not. A low interest rate results in lower interest payments. If the interest payments become less than the rental income, a negative or neutral property can become positive (assuming the rent also covers other costs associated with owning the property).
This means low rates can open up more market opportunities for positive gearing. Investors also have the other current advantage of high rents, so with thorough research you will find properties that will generate a decent passive income.
For those already invested in a positively geared property on a variable interest loan, you will be enjoying the benefits of lower interest payments and increased profit.
Unfortunately though, low interest rates will not stay low forever. Investors should take this into consideration when making an investment to ensure they can afford a drop in income when rates begin to rise again. Taking out a fixed rate loan will reduce this risk.
Low rates and high rents may also mean it becomes cheaper to buy than to rent in some areas, creating an owner occupier market and reducing demand for rentals. However, with the ongoing housing shortage in Australia and rental market going strong, any increase in homebuyers is unlikely to have a significant effect on the rental market in most areas.
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