As a new or existing property investor you probably think it’s all good news, right? Low rates mean you have lower repayments and less expense is always good.
But there is another side to low interest rates that tends to get overlooked. Low borrowing rates will automatically mean lower interest rates for Deposit accounts. They are ridiculously low in fact. On the other hand, when you focus on borrowing, Deposit accounts are not a priority but it does make you think about what other people are doing. Retirees for example or people saving for a home will be frustrated with these low returns.
Low interest rates tend to encourage people to increase their Home Loan so they can pay off high interest debts such as credit cards and personal loans. The perceived cash flow benefit can disguise the subsequent loss in equity which ultimately delays the build-up of wealth creating opportunities.
Given the current situation, let’s consider some strategies to take advantage of these low rates while still keeping our wealth creation hat on.
The first thing to do right now is to review your capacity to save. It’s important to look at your surplus income capacity so you can make decisions on what is important. You will need to have a methodology to measure your spending which in turn will show you how much you can save. This is critical to improving your property portfolio.
The second thing is you should use that saving capacity to maximise debt reduction. Rather than waiting for growth, create equity through debt reduction. Use the low rates to reduce debt on your home and improve your buffer or reserve funds to provide for emergencies or opportunities.
If you have a credit card that doesn’t go away, refinance once and for all by ensuring you understand how to manage your cash flow and then cut it up so that you don’t repeat this exercise and diminish your wealth creation outside your superannuation.
There is ongoing speculation about Negative Gearing and the fallout if there is a change of Government at the next election.
A move to no Negative Gearing would have less effect on SMSF loans than any other type of Finance. Why do I say that? Well, Negative Gearing is not critical in this type of purchase because of the ownership structure and the lending restrictions that Banks insist on.
Reduced LVR’s mean you borrow less of the purchase price but the rent remains linked to the actual value… Even though Banks use 4% as the industry average your rental return may be much higher and it’s based on the market value for the area. The Banks use of the lower figure simply reduces your borrowing power.
The less you borrow, the more the rent contributes to the repayment and as the property value increases so does the rent and most importantly, your equity in that investment. So Banks are actually doing you a favour by forcing you to borrow less. The less you borrow, the less contribution you are required to make up for the shortfall which means a smaller reliance on Negative Gearing anyway.
Further to this given the tax treatment of income and deduction within a SMSF, there is far less dependency on negative gearing or positive impact it can introduce to the equation.
Negative Gearing may come and go but the learning to use your money efficiently will last a lifetime.
In fact, a SMSF property could be the first thing to consider if Negative Gearing is abolished.
How about that for a positive outlook!
Acquiring property through your SMSF is a decision that requires careful consideration and you have to ensure it supports your overall investment strategy AND avoids unnecessary risk. For more information download our SMSF Essentials Guide to Property Investing.