Every now and again, I get a bad feeling in my stomach that things are just not right. And I’m getting that feeling now about the mortgage world. Usually when I get this feeling, it’s when I travel to a new investing location to buy houses and something jumps out at me as not being quite right. Understandably, I don’t proceed and invest there myself, so I wouldn’t buy there for clients either. And my gut is usually right!
Well, I am getting that feeling again…
So what has happened to make me feel this way?
Over the past few months, there have been small comments made by some economists that have been ambiguous. We have now hit 6 months of no economic growth, yet no one is saying we are in a recession. The definition of a recession is two consecutive quarters of no growth.
We are experiencing the lowest interest rates we have ever experienced but they aren’t low due to Australia being in a great place. Low interest rates signify a slow economy, with the low interest rates being a way to stimulate the economy. And then there’s the ‘Trump Factor’. Good or bad, he is an ‘unknown’ currently.
In the last 6 weeks, we have seen several lenders increase their fixed rates, the 5 year fixed interest rate has increased by as much as 0.6%.
Coupled with this, investment loan interest rates have increased by several lenders between 0.08%-0.25%, this is outside any RBA meeting..
Either the banks are trying to gain margin back on their lending or they are seeing troubled waters ahead. I think it’s a bit of both.
On top of this, some lenders have also changed their lending policies for investors. Policy changes include;
It would appear the lenders are either over exposed in certain suburbs or are trying to reduce their lending to investors. Of course the APRA changes have made an impact into lending policies, and we will continue to see this reflected in the coming months.
As negative as that sounds, I see this as a positive.
We will see the Sydney and Melbourne property markets that are primarily investor focused come to a halt. As a lot of the markets in the higher priced suburbs, the yileds are already too low, that tightened lending only makes it near impossible for it to keep growing..
These changes affect investors more so then home owners, or owner occupied borrowers.. Tightening of home owner markets will be impacted when/if the RBA increase rates themselves.
Now for myself, I like to invest in property cycles where the market is dead or just emerging. It means that I have zero competition from other purchasers and I can negotiate a great deal. This turning of the tides will present more locations that I can invest in, in the years ahead. And that can only be a good thing.
Unfortunately, there are many cities and regions across the country that have seen significant capital growth that was only fueled by low interest rates. These locations will become apparent when the rates start to rise, as their property markets will see instant negative growth. True colors will shine!
So what should investors be doing now to combat the interest rates as well as capitalise on new markets that will start to present themselves?
Ideas;
I myself have fixed a portion of our portfolio, left the properties I think I may sell in the coming 3 years as variable, and have switched a few to Principal and interest.. that way, we have a diversified portfolio, not only by location, but by repayments and interest rate… I don’t want to put all my eggs in one basket, but I want to keep my options open, for what opportunities may come down the track…