As many investors endure falling rents across the country, the Reserve Bank of Australia has reduced the official cash rate to a historic low of 0.10% in November.
For many investor borrowers, the rate cut was an early Christmas present.
While the RBA’s move is being seen as an attempt to help those struggling with their loans, experts believe that banks will need to pass on the rate cut for this to work effectively.
The low interest rate environment is not new. In March 2020, the RBA shaved the cash rate twice in the same month to a then-record low of 0.25%, in response to the outbreak of COVID-19.
Yet amid this backdrop, national housing rents still edged lower by 0.2 per cent in the September quarter, according to CoreLogic. But the decrease is less than half of what was seen in the previous quarter, when rents fell by 0.5%.
This was attributed to a growth in regional rents, offsetting the fall in capital city rents.
CoreLogic also noted a growing divergence between rental rates for houses and for units, especially across Melbourne and Sydney, highlighting that unit rents are falling faster than house rents.
How investor cash flows are seeing an upswing due to low interest rates
Despite the squeeze on rents – most prominent in the inner-city unit market – investors with stronger yields are experiencing a boost to their cash flow, with their properties generating incomes that are higher than the cost to hold them.
CoreLogic’s Head of Research Tim Lawless said while rental yields have dropped slightly from last year, interest rates have fallen even harder.
“Investor loans are generally attracting a mortgage rate (of) around 2.9%, compared with a gross yield across most capital cities that is above 4% for houses and 5 per cent for units, implying fewer investors would be relying on a negative gearing strategy,” he said.
In other words, if an average investor is paying an interest rate of 2.9%, yet gaining a rental return of 5%, the rent is more than covering the property’s expenses and they are likely to be pocketing surplus income from their investment property.
Only about 40% of Australian property investors are either positively or neutrally geared in the 2017-18 financial year, according to the latest data from the Australian Taxation Office.
Low official cash rate pushing down the cost of debt
Record low interest rates have no doubt given investors a leg up during COVID-19, reducing mortgage repayments for many.
Since July 2019, the average investor interest rate on new principal and interest loans fell by 85 basis points to 2.94% per annum, according to the RBA.
“Considering rates are already so low, this is a 22 per cent reduction in interest costs, which would usually be a massive stimulus for price growth that hasn’t come through,” Future Rent Founder and CEO Godfrey Dinh pointed out.
It’s common for borrowers wanting to free up some cash flow to consider interest-only mortgages.
For investors taking out new interest-only loans, their interest rates fell by 98 basis points to 3.18% during the same period.
Given that the RBA has previously indicated that the cash rate is unlikely to be increased for at least three years, investors can expect more competitive mortgage options to be offered in the market. This could in turn unlock an income source for investors to either pay off their loan or make additional investments.