The other side of the investment bubble
By Alison Burgess

7/01/2019 11:50am

There’s been more stringent regulation in recent times in the property investment market.

The financial regulators have been cracking down on the banks’ previous habit of lending far more than they should to people wanting to invest in property, and their willingness to lend interest-only, rather than the more expensive principal and interest loans.


So, what’s the difference?


Interest-only means that a borrower doesn’t pay back any of the loan (generally for a limited period), whereas a principal and interest loan refer to the borrower paying both the interest and the principal off over time, thereby reducing the loan and building equity in the property.


Whilst interest-only requires lower monthly repayments, the borrower makes no dent in the actual loan itself and this investment strategy relies on capital gain in the property itself to make any money on the investment.


If the property was bought during a property boom (as many were recently), then investors with interest-only loans are at a higher risk of losing money on their investment due to limited capital gain potential.


So, what does this mean for you?


If you are an investor who has some interest-only loans, then you may need to prepare yourself for a change in your loan structure to principal and interest, which will mean higher repayments per month.


If you are looking to invest in property, don’t be scared off by the tightening of lending criteria and more stringent testing of your ability to service the loan, it just means you will need to do your homework thoroughly before investing, and that the banks will need to ensure you can afford it.


Brighter times ahead!


Property investment overall has stood the test of time and is still one of the top performing investment types. As with most things, property investment is cyclical and that means some times are better than others for investing, but if you have a buy and hold strategy, then you can buy with care at almost any time.


Adelaide is still a great market to invest in and is such a great place to live.


Property values in Adelaide have performed well (albeit not as well as some of the eastern states over the last few years), however, an overinflated market in those states drove high prices and offered a lower potential for growth, whereas Adelaide still has much room for growth.


As more investors shift their gaze to South Australia, demand will be higher, and when demand is high, so are prices.


If you’re already a property investor in Adelaide, then you’re in a great spot, and if you’re looking to get into the market, do your homework and jump in if you can. And of course, if you need expert support, we’re here to help!