In the not too distant past, borrowers were rushing to lock in interest rates because they feared paying double digit mortgage rates.
This year, there’s been a shift to fixed rates to a different reason: fixed rate mortgages are now available from the lowest level on record, with more than 30 lenders offering deals from under 2%.
It’s even possible to fix mortgages for 4 years at under 2% now.
Even an investor seeking an interest-only loan might be able to secure finance from around 2.5% this year.
This brings about a dynamic that investors haven’t even dare to dream of in recent years, being the potential for positively geared property investments, even in the capital cities.
Yields on residential property, being a stable, high capital growth asset, have tended to be relatively low, especially in the most mature capital cities of Sydney and Melbourne.
That said, it’s not that difficult to find capital city properties generating a rental yield in the range of 4% to 6%, and this is especially so in Brisbane, Perth, Adelaide, Hobart, Canberra, and Darwin.
Although the rental market has been fairly soft this year, relative to prices – and certainly relative to the price of money – yields are more attractive than they have been for some time.
Positive gearing: a stylised example
To take a stylised example to demonstrate the point, let’s imagine you buy a property for $400,000 using a 20% deposit, which generates a 4% rental yield or $16,000 of rental income per year (about $300 per week).
If the purchase was funded with an interest-only mortgage at a rate of about 2.5%, then the interest cost each year might be only half of that, at $8,000 per annum.
Even after the costs of paying a property manager, insurance, rates, and assuming some repairs costs and a couple of weeks vacancy, you’ll still be well ahead in terms of cashflow.
…or positive cashflow
A related variation on this theme in Australia is what might be termed a ‘positive cashflow’ investment property.
Certain types of investment property can generate attractive depreciation benefits which can be included as ‘on paper’ deductions on your tax returns.
And due to what is loosely termed ‘negative gearing’ tax legislation in Australia, even a property which at face value loses money might prove to be a positive cashflow investment after the tax benefits are considered.
In reality, this is much less complicated than it sounds, and is simply reflective of the generous tax legislation in Australia for private property investors.
A window of opportunity
Positive gearing opportunities in the capital cities have never been sustained in the past, and 2021 will likely be no different in this regard.
With little realistic prospect of rising interest rates over the next few years, the opportunities will be arbitraged away by investors seeking returns and prices will rise.
But for now, at least, there’s a unique opportunity to positively gear investment property…even in a capital city.