What happens when your interest-only period expires?

Property investors love interest-only loans, but most never stop to think about what happens when the interest-only period comes to end.

As you probably know, with an interest-only loan your repayments are lower than with an equivalent principal and interest loan, as you only pay the interest component and the fees.

In other words, while you’re only paying interest, you aren’t paying off any portion of the loan.

That’s why these loans are popular with property investors, as it allows them to put more cash into paying down non-deductible debt or into other assets.

Critically, interest-only loans generally allow you to ‘pay the minimum’ for a period of between five and 10 years. When this period expires, the loans automatically switch to a principal and interest loan with a corresponding increase in repayments.

The jump in repayments can catch many investors off-guard, particularly as repayments are calculated based on the remaining term of the loan.

For instance, if you took out a 30-year loan and paid only interest for the first 10 years, the repayments (once the loan switched) would be based on paying back the loan in just 20 years.

It’s worth noting that the adjusted repayments would be higher than if you had started paying principal and interest at the start of the loan.

What are your options when your lender notifies you that your interest-only period is expiring?

Firstly, you can do nothing and simply start paying off the loan. But if you don’t want to do this, you could ask your lender to extend the period. Some lenders will do this quickly and easily, others will require some sort of credit assessment or loan switching, and some just won’t do it at all.

When the market is competitive and lenders are hungry for business, you’ll find that most will try to keep their customers happy.

Another option is to refinance the loan with another lender, which, as well as providing a new interest-only period, could save you money.

As always it’s best to talk with your trusted broker before doing anything. They will be able to advise you accordingly.

Should property investors be worried about potential changes to lending rules?

The strength of the property market in our country’s two largest cities is giving the Reserve Bank of Australia (RBA) a bit of a headache.

Prices have risen strongly over the past year in Sydney and Melbourne, encouraged by low interest rates, and the central bank is concerned the housing market may be becoming overheated.

Specifically, the RBA is concerned about the unbalance in the market from a disproportionately high number of loans being approved to investors.

Property investors have been busy snapping up residential property in droves and the RBA believes that if commercial banks are participating in risky lending, then that could make the market vulnerable to a downturn.

The RBA clearly doesn’t want to lift interest rates because of the negative impact it will have on the country’s transitioning economy.

So instead, it is working with the Australian Prudential Regulation Authority (APRA) to consider various macroprudential policies that could potentially curb property investor mortgages.

The goal is to stop banks making ‘high-risk’ property investment loans that could fuel a housing market bubble and cause a subsequent crash.

We are expecting an announcement from the RBA by the end of the year.

What type of measures could be introduced?

There are a few likely candidates and some more ‘left-of-field’ options.

There could be a cap placed on loan-to-value (LVR) rations or debt-to-income ratios, though this seems unlikely.

The New Zealand model, where lenders can only provide a certain proportion of low LVR loans, also seems unlikely from comments made by the RBA.

Another option is to make lenders perform a strict ‘stress test’ to measure new investment borrowers’ capacity to absorb a significant increase in interest rates. Most lenders already perform this sort of test but regulation could set the bar higher.

Many people believe the likely option is that banks will be made to hold more capital for interest-only loans, essentially incentivising them to promote principal and interest loans. This would make interest-only loans more expensive and therefore less appealing in the market.

How could these measures (whatever they turn out to be) affect the everyday property investor?

Any restrictions to lending could obviously make it harder to get an investment loan or reduce a person’s borrowing capacity. It could also restrict some investors from expanding their portfolio beyond a certain point.

More broadly, lending restrictions could weigh on the property market and potentially trigger a downturn, but this is unlikely.

There are also potentially positive effects from such changes. These measures could do what they are supposed to do and take out the heat of any speculative markets, therefore helping to avoid a potential downturn.

Perhaps a less obvious benefit of new macroprudential policies is that interest rates could remain low for longer and may even drop further, especially if unemployment and the dollar remain stubbornly high.

When the Sydney and Melbourne markets slow down, housing will probably take a back seat as the RBA tries to facilitate the rebalancing of the economy away from mining investment, and I wouldn’t be surprised if this meant a cut to the cash rate.

Conclusion

My belief is that new macroprudential policies would only target a small portion of the market and focus on short-term measures, which shouldn’t disrupt the market overall. The RBA won’t want to severely damage the investor market, just correct the imbalances. And the measures probably won’t be as strict as some people are suggesting.

There is also the remote possibility that all the RBA’s talk about macroprudential policies could simply be ‘jawboning’ to help talk down the market without having to regulate.

While some investors may panic and try to load up on debt while they can, that probably wouldn’t be wise. If and when measures are introduced, clever finance brokers should still be able to find solutions for investors who genuinely have the capacity to carry a loan.

Is the Brisbane market ready to take off?

Sydney and Melbourne have clearly been the stand-out cities in terms of capital growth over the past year.

For investors around the country and overseas, attention has now turned to finding the next Australian city ready to boom, and there’s more than one expert tipping Brisbane to take the mantle.

Although the Brisbane property market has been in the doldrums for some time, following the Global Financial Crisis and vast flooding in 2010 and 2011, the key indicators are certainly pointing to an emerging growth phase.

Auction volumes are increasing, more sales occurring, the average time on market is shortening, vacancy rates are relatively low and there appears to be growing interest from interstate investors.

Research house, BIS Shrapnel, forecasts growth of 17% over the next three years and there are already signs of growth with the median house price on an upward trend.

What’s driving the growth? Low-interest rates are one factor but given that rates have been low for some time it’s probably more a case that confidence is now re-emerging.

With expectations of growth, many more buyers are deciding to upgrade while there is still value in the market.

Local buyers are being joined by those from interstate, who either made money in Sydney or Melbourne or missed out on the recent upswing and are searching for higher yields and growth potential.

Historically, Brisbane has always lagged behind Sydney by about 12 to 18 months.

Brisbane continues to record rapid population growth and the city has its own supply-constraint issues, which are fundamentally driving the market.

The economy has always been strong and there is currently considerable infrastructure spending underway, adding more fuel to the fire.

All of this is adding up to a positive outlook for the property market over the short-term. There is, however, plenty of development activity happening in the city, especially with regard to apartments, so there is the potential for an oversupply and poor performance in some areas.

Investors looking to get into the Brisbane market – especially those from interstate – should certainly tread carefully and seek expert help from a professional they trust.

Momentum Wealth named in Fast 100

Momentum Wealth is delighted to have been recognised as one of Australia’s fastest-growing companies in 2014.

Momentum Wealth was named in BRW’s Fast 100 list, which recognises Australia’s top growth companies, both public and private, for the year.

The achievement caps off a great year for Momentum Wealth after winning a swag of industry awards for outstanding customer service and excellence in business.

These include REIWA’s 2014 Best Large Residential Agency of the Year award, the 2014 Business News Rising Stars award & People’s Choice award and the award for Best Independent Office of the Year at the 2014 Better Business Awards.

Following on from these successes, we’d like to thank our clients for their ongoing support and helping us to win these highly-regarded awards.

9 simple things you can do to get tenants to pay more

When the rental market stagnates, investors have to turn to innovative solutions to secure higher rents.

Rather than just sitting and waiting for the market gods to shine, why not make simple improvements to your properties that will have tenants happily throwing extra money in your direction.

The right sort of improvements can easily pay for themselves in a couple of years through depreciation, increased rent and fewer vacancies.

Here are nine relatively simple things you can do to your property that tenants will love and happily pay a bit extra for.

Install air-conditioning This is always high on the list for tenants in Perth and other sunny places, especially when summer is approaching.

Add a dishwasher Nobody likes doing the dishes, so tenants will often pay a bit more for the convenience of a dishwasher.

Give the car a home Most people greatly value their cars, so providing a simple shade sail or carport structure can make your property more valuable in the eyes of potential tenants.

Provide a bit of extra security Every rental property must have certain security features like door and window locks, but providing extra things like sensor lighting and security screens can help increase the rent you can charge.

Allow pets Given how many people own, or want to own, a pet, opening your rental property to pet owners can help increase your returns by widening your pool of potential tenants.

Do a quick paint job While not as easy as some of the other items on this list, a new paint job can do wonders for the appeal of a property and even increase its value.

Tart up the outdoors Tenants tend to value useable and attractive outdoor space, so if you can create some without too much trouble it can pay off financially.

Install new carpets There’s something about new carpets that tenants just love. Maybe it’s the smell of virgin ground. Whatever the reason, tenants will often pay for the privilege.

Offer a long-term lease This is something you may not have thought about, but some tenants would gladly pay a bit extra for the security of a long-term lease. It can be very costly to have to move every couple of years.

Speak with your property manager who can provide the best advice about how to maximise your rental returns in the current market conditions.

Proposed changes to R-Codes could spell disaster for some investors

A few months back, the Western Australian Planning Commission (WAPC) put forward a series of amendments to the residential planning codes (R-Codes) that, in effect, will significantly reduce the development potential of many properties in areas zoned R30 and R35.

The proposed changes will reduce the number of multiple dwellings currently allowed in R30 and R35 zoned areas throughout the state.

If approved by the State Government, the proposed amendment, which will affect thousands of property owners, will undermine progressive changes that cater for WA’s rapidly growing population.

Changes implemented in 2010 created the potential to build seven to 10 units on 1,000 square metre blocks, which are zoned R30. However, if proposed WAPC R-Code changes are approved, blocks of this size in R30-zoned areas will only be able to accommodate three units.

The downgrade, which will ultimately lead to a reduction in property values, will affect properties in inner city locations, as well as properties zoned R30 and R35 in many areas which are more than 15 kilometres out of the city, and regional locations.

Increasing density to cater for a growing and ageing population is a sensitive issue that needs to be well thought-out and carefully managed. No one is suggesting that medium or high density should be in every street and every suburb.

Encouraging quality designs and appropriate location choices are essential components of planning for our future housing needs. For example, a quality design can deliver a seven or 10-unit development that is smaller in terms of building size than an equivalent three-townhouse development.

However, if Perth is going to accommodate a rapidly growing population, which increasingly wants to live near work and amenities, and we want to reduce congestion on our roads, we simply can’t afford the urban sprawl to continue indefinitely.

All property owners are encouraged to express their opposition to the amendments. Submissions or comments on the amendment may be emailed to rcodesreview@planning.wa.gov.au. Submissions close 5pm, Friday 14 November 2014.

Popular suburb that is minutes to anywhere

Despite its central location, 11km from the Perth CBD and 5km from Fremantle, Melville is a relatively quiet residential suburb, with good access to major hubs, the river and the beach.

Its neighbours are the riverside suburbs of Bicton and Attadale to the north, Alfred Cove and Myaree to the east and Willagee to the south.

Residents of Melville have plenty of retail options with Melville Plaza, a good-sized local shopping centre, located on the suburb’s border. The popular Garden City is also just five minutes away. The same can be said for cafes and restaurants with popular strips nearby in Ardross and Fremantle.

There are a number of parks and open spaces in Melville, including Kadidjiny Park, which cost nearly $10 million to develop, and opened to the public in late 2010 offering a playground, barbecues and large amphitheatre.

The suburb has a primary school and an independent public high school, though many children from the area attend one of the nearby private schools.

Melville has numerous bus routes linking residents to key employment and lifestyle centres, as well as to train stations on the Mandurah line. It also has good access to Canning and Leach Highways, which bound the suburb to the north and south respectively.

Most development occurred in the 1950s, so houses in Melville typically sit on large blocks. However, many original homes have been knocked down and replaced with modern ones. There are very few units and villas in the area.

The median sales price for houses in Melville currently sits at around $815,000, and the suburb can sometimes be found on the list of fastest-selling or most-searched-for suburbs in Perth.

RBA leaves rates unchanged

The Reserve Bank of Australia (RBA) has kept interest rates on hold at 2.5% following its November meeting.

Announcing that rates would not be changed, RBA governor Glenn Stevens said that most data in Australia was consistent with moderate growth in the economy.

“Overall, the bank still expects growth to be a little below trend for the next several quarters,” Mr Stevens said.

The decision to leave rates on hold was widely expected from most economists.

Mr Stevens said that credit growth was moderate overall, but there had been a further pick up in lending to property investors, and that dwelling prices had continued to rise.

Furthermore, he noted that interest rates were very low and had continued to edge lower over the past year as competition to lend had increased.

Mr Stevens said some forward indicators had showed that employment had been firming throughout the year, however the labour market had a “degree of spare capacity” and that it would probably be some time yet before unemployment declines consistently.

He reiterated that resource sector spending was declining as some areas of private demand were expanding, albeit at varying rates, and public spending would remain subdued.

“On present indications, the most prudent course is likely to be a period of stability in interest rates,” Mr Stevens said, noting that inflation was running between 2% to 3%, as expected.