Despite the Reserve Bank of Australia again electing to keep interest rates on hold at the historically low level of 1.5 percent this month, all four of the big banks have raised interest rates for investors and owner-occupiers over the past week. This move has been seen as preemptive of further tightening of financing by the Australian Prudential Regulation Authority (APRA), which regulates bank lending across the nation.
With much of the media focusing on how housing prices are underpinning the strength of the property market, particularly in Sydney and Melbourne, less attention has been given to how low interest rates have allowed borrowers to borrow more and increase their household debt.
Whilst interest payments on household debt are currently very manageable, increasing interest rates will put pressure on those investors and owner-occupiers who have potentially over-extended themselves via interest-only loans. Currently, 40 percent of new loans are for investors, with the Australian Bureau of Statistics revealing last month that majority of these investor loans are interest-only. This means the owner never actually pays off the house, they are just holding a mortgage and paying interest costs whereas the bank owns the property - ensuring maximum return from negative gearing but also exposure to greater financial risk.
With interest rates likely to increase again this year, now is a great time to explore your current financial position, including reconsidering your current home loan. All property owners would be wise to factor in a safety margin to mitigate the impact of future rate rises. This could include fixing your loan, improving the rental return, reducing the debt owed or restructuring your property portfolio.
To discuss the future potential of your property investments or home, or to find out how to maximise your current rental return, contact your local area experts on 03 9091 1400.