As property prices continue to rise, purchasing in a centrally-located or sought-after area is getting out of reach for the average working millennial. Instead, many are opting to rent rather than buy as it means not having to compromise their inner city or beach side lifestyle. But for those who are still eager to enter the market, there is a way to get the best of both worlds.
The Reserve Bank has left interest rates unchanged at the historic low of 1.5 % for the 20th consecutive meeting. The current holding pattern is the longest stretch without a move, with the RBA last changing rates with a 25 basis point cut in August 2016.
The decision was of little surprise, with the market pricing no chance of a move. RBA governor Philip Lowe maintained both the domestic and global economies were gaining strength.
Following a spate of stronger-than-expected data, economists have upgraded the consensus GDP growth forecast, to be released to tomorrow, to about 2.8 % year-on-year for the first quarter.
While increased government spending on infrastructure and a stronger contribution from the export sector had helped boost the RBA’s confidence, household spending remained a worry.
“Household income has been growing slowly and debt levels are high,” Dr Lowe said.
“Wages growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time.”
The statement was largely unchanged, apart from acknowledging lending conditions were likely to tighten.
Alluding to the impact of the banking royal commission, Dr Lowe noted, “while there may be some further tightening of lending standards, the average mortgage interest rate on outstanding loans is continuing to decline.”
“We think there’s a real risk that tighter credit conditions could crimp GDP growth and contain price pressures,” Mr Dales said.
“That would mean the ‘progress in reducing unemployment and having inflation return to target’ would be even more ‘gradual’ than the RBA expects.”
Indeed.com economist Callum Pickering said raising rates would be particularly risky right now given house prices are falling steadily in both Sydney and Melbourne, geopolitical risks are ever present, and retail sales growth remains disappointing.
“The banking royal commission also raises the prospect of tighter lending conditions and out-of-cycle rate hikes by the major banks,” he said.
“The RBA may not need to tighten because the banks will do so independently.”
It is possible for people to launch into the property investment market in their early twenties – in fact, this is a great time to start, when you are first launching into your career and don’t yet have any other financial responsibilities such as a family to support.
However, buying an investment property can never be an impulse decision – it takes self-discipline and applied knowledge to start building a profitable investment property portfolio. Read more
The Reserve Bank has kept interest rates on hold at the historic low of 1.5 per cent for the 19th consecutive meeting.
If you are looking for a sound real estate investment, look beyond the typical two bedroom apartment and consider expanding your portfolio with a commercial property. There are three types of commercial property – office, retail and industrial.
There are some significant differences between investing in commercial and residential real estate, each with a potential positive or negative impact on your investment.
It is now the 18th consecutive board meeting where the RBA has not budged from its emergency setting. The non-move equals the previous longest stint without rates changing since the RBA became independent from Federal Treasury, set between January 1995 and July 1996.
The RBA last moved in August 2016 with a 0.25 percentage point cut.
Despite many economists believing the RBA had lost some conviction in its GDP growth forecasts, the decision was widely expected. Futures markets had priced in a 0 per cent chance of a change.
In its post-decision statement, the RBA again avoided its earlier mention of GDP growth running above 3 per cent over the year, lowering its sights to it should be stronger than last year’s 2.4 per cent.
In his statement, RBA governor Philip Lowe said the current “low level of interest rates is continuing to support the Australian economy”.
“Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual,” Dr Lowe said
“One continuing source of uncertainty is the outlook for household consumption, although consumption growth picked up in late 2017.
“Household income has been growing slowly and debt levels are high.”
While the RBA’s view on the domestic economy remains relatively unchanged, there was a shift in emphasis in the global commentary, particularly regarding concerns about US trade policy and tightening credit markets.
“Equity market volatility has increased from the very low levels of last year, partly because of concerns about the direction of international trade policy in the United States,” Dr Lowe said.
Dr Lowe said financial conditions remained “expansionary”, but credit spreads were widening, and interest rates were rising around the world for reasons other than the recent increase in the US federal funds rate.
“This has flowed through to higher short-term interest rates in a few other countries, including Australia,” Dr Lowe said.
Events in the US had already impacted the short-term funding costs for Australian banks and led some smaller lenders to raise their mortgage rates. This global tightening in lending conditions reduces the need for the RBA to raise official rates for the present.
Last month the US Federal Reserve raised its official interest rate setting above the RBA cash rate for the first time since early 2001.
These are strategies that anyone can try. Needless to say, your goal of getting ahead of credit card debt is more achievable if you cease or at the very least limit your spending on cards.
This marks the 19th consecutive month the RBA has kept the rate steady since it cut the official cash rate by 25 basis points in August 2016.
The move was highly expected by many brokers and economists. More economists and banks are changing their forecasts of interest rate hike this year – from two to one or none.
Last month, ANZ abandoned its previous forecast of two interest rate increases this year, and now expects no rate hike at all.
“We no longer expect a rate hike in 2018, following the greater than expected emphasis on the mid-point of the inflation target band and increased comfort on financial stability risks in the RBA Governor’s speech on Thursday evening,” said ANZ’s head of Australian Economics, David Plank.
RBA Governor Philip Lowe said in a speech on 8 February that interest rates would have to start moving up if the economy makes further progress in reducing unemployment and in having inflation return to the midpoint of the target range.
From its forecast of two rate hikes this year, NAB now expects only one in late 2018, citing weak growth in wages and the slow progress in bringing down unemployment.
“It is not impossible that the RBA stays on hold for all of 2018 and raises rates in early 2019,” said NAB chief economist Alan Oster last week.
Meanwhile, ABC Bullion expects the next move in rates to be a reduction. Its chief economist Jordan Eliseo said that while employment data, business conditions, and growth figures are solid, there seems no obvious catalyst to turn around the record low wage growth. He also expects a slowing property market to weigh on confidence.
Refinancing isn’t as straightforward as you might expect. The type of renovation proposed goes a long way to dictating the loan required. If the wrong loan is chosen, you could be left with a pile of unexpected debt.
Know your budget
Before considering refinancing, you need to have a clear idea of your budget.
If you underestimate your budget, you run the risk of getting knocked back from your lender if there has been a cost blow out.
Be conservative with your projection. If you think you need $100,000, allow for contingencies and apply for an additional 10% -20% just in case, if you can afford it. The key is stick to your budget. What you don’t need can be cancelled once the building works are completed.
Line of credit loan (Home equity loan)
Also known as an equity loan, to be eligible, one must be looking to make upgrades to the cosmetic domain of their property.
Installing a new bathroom or kitchen, painting the interior or exterior of the house and other basic construction falls under a line of credit loan.
These renovations, often, do not supersede the costs of structural changes, so homeowners can call on up to 80 per cent of their Loan-to-Value Ratio (LVR).
A line of credit loan is a “revolving door” of credit that combines your home loan, daily spending and savings into one loan.
If you choose a line of credit home loan, it essentially works as a large credit card. You can use it to purchase cars, cosmetic renovations and other investments. However, the interest-only charge starts when the equity is drawn down.
Keep in mind, line of credit loans provide you with money that can gather interest quickly, so if you are ill disciplined with repayments or money, speak to that matches your unique circumstances.
Construction loans
Construction loans are suitable for structural work in your home, for example, if you’re adding a new room or making changes to the roof.
Construction loans give homeowners the opportunity to access larger sums of money, with the amount dependent upon the expected value of the property after renovations are completed.
The advantage of a construction loan is that the interest is calculated on the outstanding amount, not the maximum amount borrowed. This means you have more money available in your kitty, but only pay interest on the money you choose to spend. For this reason, the broker may recommend that you apply for just one loan, but leave some leeway in your borrowed kitty.
When applying for a construction loan, council approval and a fixed price-building contract are required.
Your lender will appoint an assessor to value your construction at each stage of the renovation. This will happen before you pay your instalment. When construction is complete, speak to your mortgage broker as you may be able to refinance back to the loan of your choice.
When looking at both these loans, consumers can call on other property they own to boost their overall borrowing amount if they wish.
Broker advice
If you speak to a broker, they will be able to determine which loan will give you the options you seek. This advice is essential, as a poorly planned construction loan could cost you more down the road.
Consumers should ask their broker, ‘What type of loan am I eligible for?’, because if you don’t get your construction loan right, you may be jeopardising your bank security.