HOW DOES LOWER INTEREST RATES IMPACT PROPERTY INVESTMENTS?

Since reducing the official cash rate to 0.25% basis point in March 2020, this week was the 6th consecutive month Reserve Bank of Australia kept the cash rate unchanged. According to PM Scott Morrison update, low rates are here to stay and "we could expect them to stay lower for at least three years, if not more". 

From 17.5% cash rate in January 1990 to 0.25% in September 2020, the reduction in interest rate has played a significant role in house prices in Australia.

Rate cuts are often used to stimulate the economy, and it is no hidden truth that interest rates have a profound effect on Property Investments.  

Let's look at five ways in which lower interest rates can impact property investments.

1. Money in the Bank starts Depreciating

For savers, lower interest rates are a huge problem as they will see their cash eroded.  After paying bank fees and income tax on any interest earned, their money hardly grows, and if compared with the inflation, their money is actually depreciating in value.  

In times like these savers look for alternate safe havens to invest and often find shelter in the property investment.

2. Cashflow Boost

Lower interest rates reduce the interest payable on loan, which results in a cashflow boost for borrowers. 

With reduced cost for homeowners, their monthly disposable income can go up, enabling them to be investment-ready faster.

Cashflow boost makes the overall return on property investment even better considering the fact that other costs such as council rates, property management fees etc. stays the same.

With current historic low interest rates, an investment in the right property can increase the chances for it to be a positive cashflow asset.  

3. Borrowing Power Increases

Lower interest rates enable borrowers to borrow more money as the ability to repay the loan improves.  Lenders will still take into consideration several other requirements such as other liabilities, employment history, credit score etc.

Increased borrowing power enables owner-occupiers to upgrade their homes much easier and on the other hand, allows investors to purchase more investment properties.

4. Stimulates the Property Market 

With improved cashflow and higher borrowing capacities triggered by lower interest rates create a favourable environment for owner-occupiers as well as property investors. 

As a result, the demand for properties increases and since the supply remains limited, it tends to push the property prices to go up. An upward trend in property prices often drives more people to enter the market. 

5. Supply starts to increase

Lower interest rates also enable developers to access more funds for their projects.  When coupled with increased demand and higher property prices for new properties, more new projects start taking off the ground. 

With an increase in new projects, more jobs are created in the market, which helps to reduce the unemployment rate and increase buyer’s confidence. 

The Obvious

It is obvious that with all the negative media and uncertainty, especially due to the current health crisis, it can be challenging to make an investment decision.  

Fact is property investment is a long-term game, and there are opportunities in every market. Key is to seek expert help to make the right investment decision.

Team SONI can help

At SONI, your growth is our commitment. We have a system in place to identify your current situation, your needs and aspirations, your concerns and your risk appetite. 

We take time to educate you on the property investment and implement a tailor-made investment strategy to build wealth through property. 

Whether you are looking to buy your first home, your first investment property or to build on to your existing portfolio be rest assured our team of experts have extensive experience and are committed to making things happen for you.

Book your 60-minute no-obligation Wealth Consultation NOW via this link https://lnkd.in/ezYrnFi

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