I think the ability of accessing the extra LVR are more important that the raised interest rate

Thought I will share my opinion on this issue combined with some first hand experience, as it seems like the recent hot topic is around how raised interest rate would affect investor's appetite in investing and how increased interest rate will affect the property market.

But what I observed is that people were not investing as aggressive now is because of the strict LVR restrictions from the banks that is physically stopping them.

The below example will show how it can affect the market:

Existing home loan of $500k

Interest rate at 4.5% = $1875/month repayment

Interest rate increased to 5.5% = $2292/month repayment

Difference = $417/month

Now lets say the property is now worth $750k

LVR 80% = $600k

LVR 90% = $675k

An extra $417/month repayment is not as vital as not being able to access the extra $175k.

It is easier for people to adjust their budgeting to save an extra $96 bucks per week but they are highly unlikely to get an additional $175k overnight for the down payment.

So clearly LVR is the "hard" factor that has more controlling power towards high leverage borrowers and to continue to drive the market.

Whereas interest rate is a"soft" factor that plays a big part on borrower's psychological level.

All the major lenders are heavily advertising their home loan rate. That action tend to divert consumer's focus to RATE ONLY, which I believe the restricted LVR has a much bigger impact and we as an investor should look at lenders that are able to provide a looser LVR policy rather than who offer the cheapest interest rate on the market.

I also believe if banks are to further restrict their LVR Policy the property market might dive into a deeper hole as people will be less likely to be able to borrow and those that are living on equity will no longer be as comfortable as they used to be.

 

Lenders advertise rate because the majority of people only own 1 property which is their home. That is, most people don't care about LVR or reduction to serviceability as they are not looking to access the equity in their homes to purchase the next IP

 

The biggest effect to investors trying to build a decent size portfolio is borrowing capacity. You have to be earning a decent income now in order to service a large level of investment debt. Sure - there's ways to assist with improving borrowing capacity (right lenders, structure, properties, etc) but a decent income and little non-deductible debt is going to be the key for anyone wanting to hold a large portfolio going forward.

Cheers

Jamie

 

Rate is such an emotional topic for most people b/c from the outside it's the main discernible difference between lenders. Banks don't advertise their policy, they advertise their rates and it's what we've all come to see as their main point of difference.

And for the majority who have their home and that's it, it's perfectly fine. But as soon as you want to do anything slightly outside the square, it's all the invisible stuff that matters so much more than rate.

 

To put it simply:

Interest rate is a very important factor in selecting a mortgage...
... assuming the bank will actually give you the money at all.

If the bank won't lend you the money you need, it doesn't matter how cheap their rates are.

 

This is going to impact everyone differently depending on their personal Capital and Cashflow positions and is exactly why an astute property investor should look at creating a property investment strategy or working with a professional to assist with this.

Ultimately, a client with limited capital (deposit/equity etc) but access to additional cashflow (on going investment contributions) is likely to place more emphasis on the ability to obtain a higher LVR.

Another client however, with access to higher upfront capital contributions but less ongoing cashflow, is going to be more concerned about the impact of increased interest rates.

 

Great post!!!
Banks and Lenders use rates and special promotions to target home owners with 1 home only.
But depending on what the client wants rates may not be an issue.. just done a deal for a client where rates was not important but certain loan features where a must.