Property investors know it’s a good time to restructure lending, and if they don’t know then they should seriously consider it.
Why is it such a good time?
There are three key things that make it a good time and they include;
- The favorable LVR rules that exist at the moment – but may not last long
- The low interest rate environment
- Ability to get your property investment cashflow positive
In the last 20-years we have never seen an environment where these three things have aligned to offer investors such an opportunity.
Right now investors have an opportunity to restructure their lending to better protect their assets and position themselves to take advantage of future opportunities.
So let’s dig into these key areas in some more detail.
The Favorable LVR Rules
When COVID hit the Reserve Bank relaxed the LVR rules and that meant property investors were able to borrow up to 80% rather than being restricted to 70%.
The Reserve Bank made the changes to the LVR rules to help protect the property market at a time when many economists expected the property values to tumble. They wanted to ensure that as many buyers could enter the market and help hold up the property prices.
This was non a permanent change. The Reserve Bank announced the changes to LVR rules on 30th April 2020 and these are temporary for 12-months will expire on 30th April 2021 unless they decide to extend this.
We now know that the property market has not crashed and in fact in most areas the property market has been very strong and leading economist Tony Alexander now believes the Reserve Bank will reintroduce LVR rules for investors come May next year meaning you will then require 30% deposit again.
The LVR rules are favorable now, but don’t expect that window of opportunity to remain open for too much longer.
Take Advantage Of Low Interest Rates
We are in a time of record low interest rates and there is every chance that they will go lower still.
Nobody is talking of any interest rate increases in the near future.
In the past when mortgage interest rates were over 5% then you needed to search for a property that had a good yield, or you needed to start with a good level of equity (your deposit) to help balance the books. It was hard to find properties in the cities or larger towns that was able to produce a positive cashflow. This forced many property investors to seek out opportunities in the smaller towns.
Now with mortgage rates under 3% is starting to look better. You can now find properties in the cities and larger towns that will provide positive cashflow, and properties in the smaller towns are looking better as investments too.
Low interest rates are meaning that people with money on deposit are also looking for alternative investments.
Focus On Getting Cashflow Positive
Every property investor aims for their portfolio to create a passive income for them.
Of course in normal markets this will take some time and need income (rents) to increase and costs (interest) to reduce. This generally means starting with a property that has negative cashflow, then waiting for rents to increase and at the same time paying the mortgage off to reduce interest costs.
At the moment we have an advantage with both;
- High demand for rental properties which is seeing rents increase.
- Record low interest rates and predictions that they could reduce even further and stay low for some time.
This has created a perfect opportunity for investors to accelerate the pace of mortgage reduction and therefore move properties from negative cashflow to positive cashflow.
It’s A Good Time To Restructure Lending
If you are a property investor, or want to start investing then it’s time to review and restructure your lending.
The banks and often even non-bank lenders will almost always insist on cross-collateralisation which is linking all properties as security for lending. As mortgage advisers we have always suggested that this is not a good idea and with the potential changes to the LVR rules you should want to split up your lending now while you still have the opportunity.
You can currently borrow up to 80% on an investment property, but that is expected to reduce to 70% on 30th April 2021.
Even if you don’t need the extra 10% right now, it’s a good idea to have access to that extra equity so you can take advantage of opportunities in the future.
If you have recently borrowed 80% to buy a rental property or have a mortgage on your rental with the same bank (linked to your home) then it’s a good time to restructure lending.