As investors use rate cuts to pay down mortgages and be more active in the market, this may see a tightening to credit restrictions, according to Riskwise
Historically low interest rates are motivating investors to pay down their mortgages faster, according to an expert buyer’s agent.
Your Property Your Wealth director and buyer’s agent Daniel Walsh said savvy investors were making the most of lower repayments by funnelling any additional cash flow into their mortgages.
“Investors with variable mortgages have seen interest rates tumble by one to two percentage points over the past year,” Mr Walsh said.
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“Some investors have also opted to refinance now that the lending environment is more favourable to them, which has resulted in their repayments dropping even more.
“Rather than frivolously spending that extra cash flow, many investors are opting to pay down their debt.”
Mr Walsh said the tactic was not surprisingly given it was an urban myth that negative gearing was an “investment strategy”, with most portfolios becoming neural or positively
geared within a few years.
“In fact, the 2019 PIPA Investor Sentiment Survey found that 52 per cent of investors expected to be positively geared within five years,” said Mr Walsh.
“What’s interesting is that the research was conducted before one of the recent rate cuts, so that timeframe is likely to be dramatically shortened.”
Mr Walsh bought his first investment property 10 years ago when he was a 19-year-old an auto-electrician apprentice.
Today, the 29-year-old owns a $4 million, nine-strong property portfolio that has $2 million in equity with his wife Sophie.
Like many other investors, he recently refinanced his portfolio and now has an extra $9,000 in cash flow to pay down their borrowings as well as increase their passive income to $68,000 per annum.
“We are using those extra funds to pay down our portfolio, which at the end of the day is the goal for all investors,” said Mr Walsh.
“Of course, buying strategically located properties will increase your chances of solid future capital growth.
“However, the debt does need to be repaid at some point and the current lending conditions as well as low interest rate environment makes the timing perfect for investors, like us, to do just that.”
While the past few months have seen APRA loosen its restrictions on lending somewhat, an improvement in the property market, particularly in Sydney and Melbourne, is likely to see a rise in investors.
And this might be all the banking regulator, Australian Prudential Regulation Authority (APRA), needs to return to stricter conditions for lenders, according to RiskWise Property Research CEO Doron Peleg.
“APRA is watching the housing market closely, particularly given ultra-low interest rates, high household debt and clear signs of revival in borrowing for speculative purposes,” said Mr Peleg.
“It should be noted that strong investor activity is often perceived by the RBA as ‘speculation’ that increases the risk to the financial stability.
“Consequently, it could spark the reintroduction of macroprudential measures by APRA.”
In 2014, APRA introduced a 10 per cent limit on annual growth in loans to property investors and, in 2017, a 30 per cent limit on interest-only loans as a proportion of new lending.
“Overall, APRA's stated objectives have been achieved. Earlier this year APRA self-assessed its macroprudential policies commenting its intervention had prompted a sustained reduction in higher risk forms of lending, strengthened lending standards and reduced a build-up of systemic risk in residential mortgage lending,” said Mr Peleg.
“It also states potentially speculative lending for property investment has been significantly reduced as has the proportion of interest-only loans.”
However, household debt has reached a record high (more than double annual income, according to research from NAB) and wage growth remains low at 2.2 per cent, while property prices are slowly making a comeback.
And this has sparked debate as to whether the RBA will yet again lower interest rates next month (the most recent one being in October) to 0.5 per cent.
“A sustained period of ultra-low interest rates as we have seen and, consequently, a significant increase in housing finance, is highly likely to see a rise in investor activity,” said Mr Peleg.
“So, if increased investor activity contributes to double digit growth, this will mean it is highly likely APRA will be forced to consider the reintroduction of further macroprudential measures.
“While it's hard to project the specific measures that APRA might implement, it is highly likely that those measures will be applied on borrowing for speculative and high-risk property investments.”
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