Faced with high property prices, plenty of Gen Ys – Australians born between 1980 and the early 2000s – are making their first property purchase a rental investment rather than an owner occupied home.
In fact, according to an industry study, almost one in five Gen Ys own at least one rental property.
There are merits to buying as an investor rather than as a home owner – and there’s more to it than being able to claim the ongoing costs of a rental property on tax.
Buying as an investor means you’re more likely to make a purchase decision with your head – not your heart. And because personal needs about a property don’t really matter, you can choose from a broader range of areas and property types.
Sure, your rental property may not be where you’d choose to live, but getting onto a rung on the property ladder is likely to be a good thing.
However all would-be property investors need to bear in mind that interest rates on investment loans are rising.
This follows requests by banking watchdog, the Australian Prudential Regulation Authority (ARRA), to slow down the growth of investment lending and thereby help to maintain property price growth at sustainable levels.
Ultimately that’s a good thing for all property owners. In practical terms it means a widening gap between the interest rates that apply to investment loans versus owner occupied loans.
Research by comparison site RateCity shows 55 lenders have introduced different interest rates for investors as opposed to home owners. Across the board, investor rates have climbed by up to 0.48% in recent months while rates for owner occupiers have dropped by up to 0.39%.
This sort of two-tiered rate system is not new. We saw it widely in Australia until about a decade ago, and on the plus side it really forced investors to do the maths and check that a rental property stacked up as a solid long term investment.
On the flipside, RateCity say some lenders are trying to entice home buyers into the market with eye-catching deals like $2,000 cash-back offers.
I would certainly caution against taking out a home loan based on a short term perk. The really important things are the merits of the property itself and your ability to comfortably make repayments, especially when and if interest rates rise – and this applies to both owner occupiers and investors.