Property investors are being lulled into a false sense of security due to the current historically low interest rates, claims a wealth management firm.
According to Elston Partners’ investment manager Grayden Taylor, property investors are overextending themselves. While capital city markets have experienced solid growth over the past year, Taylor says investors are too focussed on getting into the market while rates are low and failing to consider their financial situation when interest rates inevitably rise.
“What we are starting to see is that buyers are looking at how much of a loan they can afford to service with interest rates at current levels, and are therefore able to borrow more and pay more for a property,” he said.
“However if interest rates rise only 2.5%, this would double the cash rate. Given this is from such a low base, we are looking at a dramatic impact on repayments. In fact, it is much more than we have seen in previous interest rates cycles, just because rates have dropped so much.”
Taylor is urging investors to consider the worst case scenario when investing in a historically low interest rate environment.
“Times are good now, and banks are lending generously because investors can afford to borrow more. However, the amount of prospective buyers will most certainly drop when rates are higher, and lending approvals therefore are lower,” he explained.
“Investors in mortgage stress because they overextended when interest rates were low will be most affected when demand is significantly lower, and there are fewer buyers with money to spend.”
According to the latest monthly banking statistics released by APRA
, loans to investors increased to $451 billion in October. This was up 1% from September and 10.7% since October 2013. In contrast, loans to owner-occupiers increased by 0.8% from September and 6.8% from October last year.