Financial services firm UBS says scrutiny over lending, from the outcome of the royal commission into banking and the financial sector, could bring about changes to interest only loans.
Prudent lending may require traditional interest and principal mortgage loans only in future. These could make a big difference to those of us considering a rental property as a sound investment.
Everyone remembers what the subprime crisis did to the US economy in 2007, where banks basically lent money to anyone with a pulse. This created a false housing bubble with unsustainable loans. As we know the bubble burst in a spectacular way.
So, hoping tenants rent will cover interest may no longer be enough. Coupled with two probable interest rate hikes hovering around this year, now more than ever we need to get the math right. Investment properties can be financially rewarding, especially long term. Finding the right property at the right price is obviously key, but a good investment is dependent on several factors.
Location is something you can't change.
Reno queen Cherie Barber still recalls the disaster of her first investment property. Purchased on a busy road, adding reno costs etc she ended up selling at a loss.
Purchasing the worst house in the best street is still a good rule of thumb. If you purchase a property because it's cheap, it may not sustain the escalated price of renovations or improvement costs when it's back for sale.
Check other sales in the area, is there steady capital growth? For long term investments i.e. 10 years, calculate 10 years of rates (land and water) landlord insurance, maintenance costs, any shortfall to interest payments and property rental real estate fees during the life of the loan.
If you're really keen on a home, you can enter into a conditional contract subject to having pest and building inspection reports done.
Architect reports that check structural integrity, wiring, plumbing and conceptual renovation advice at this point are crucial. You may wish to add another storey or extend the footprint, you need professional advice on privacy, easements, and the building envelope allowed.
At sale time calculate up to three per cent sales commission, conveyancing fees and any possible capital gains tax you may incur. If you do the research and the numbers stack up, we may find the tightening of the financial rules may open up the property market.
Particularly with the inflated city property market, this could stabilise prices. Fewer buyers clearing the way for savvy investors could be the outcome.
We'll have to wait and see.