Lenders are struggling to keep pace with an unexpected increase in applications from people who have fled the share market into the security of property, taking as long as a month to approve loans, which has led to some buyers missing settlement dates. Strict new lending criteria are adding to delays, as is the inexperience of home buyers having trouble navigating a maze of paperwork. Banks are being forced to add staff to mortgage processing divisions, which they had previously run down.

Adding to the complexity is recent changes to Australian superannuation laws, which allow superannuation funds to borrow in certain circumstances. A self-managed fund can therefore borrow some of the value of a rental property which is well-let. However the lending criteria for self-managed superannuation funds are still being ironed out by some banks. The prudential requirements of the superannuation legislation do not appear to allow for negative gearing, and with the concessional rate of tax negative gearing is unnecessary in any event. Accordingly, given that interest rates are roughly one-and-two-thirds times net rental returns, equity of about 50% will be necessary to borrow money to buy property through your self-managed superannuation fund.

Despite the economic slowdown, the number of home loans is increasing. The latest ABS figures show that the average home loan in Western Australia jumped by over $30,000 during the past year to $264,800.

Despite the strong rise in average home loans, there are still affordable properties in most capital cities, and these are highly sought after as rental properties. There is a tendency to overlook the capital growth potential of older style apartments as well as the large increases in weekly rent that can be achieved through cosmetic renovations. In the current market where there are a large number of homes for sale, properties which are poorly presented are heavily penalized by buyers. This represents an opportunity for astute investors to purchase an older style property in a good location which only requires cosmetic renovations such as new carpet and internal painting.

Investors who renovate these older style apartments can achieve substantial increases in weekly rents and this means that any mortgage taken in respect of the rental property can be speedily repaid.

It is also possible to buy cheaply in areas where there’s a large amount of mortgage stress. For example, Sydney’s Bankstown sits in the federal electorate of Blaxland, an area acknowledged as having one of the highest rates of mortgage defaults in the nation. According to Federal Member for Blaxland, Jason Clare, “The statistics tell it all. Three families in our local area lose their home every single day,” he said. “Three hundred families lost their homes in our local area last year”. This appears to suggest that between 2008 and 2009 the number tripled.

Fewer people able to buy their own homes mean higher demand for rental accommodation, which means better returns for investors. Investors remain noticeably skittish about the share market even after rebounds owing to weaknesses particularly in the US banking sector: the shortfall in housing in Australia means that property remains a better bet over all than shares in the long term. Buy responsibly, borrow responsibly and you’re in front.

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Category: Finances
Keywords: mortgage broker, mortgage brokers