Property Investors Need to Protect their Cashflow from Out of Cycle Interest Rates

By Paul Bennion, Managing Director, DEPPRO

The recent decision by Westpac to increase its variable home loan interest rate by 14 basis points in an effort to recoup an increase in borrowing costs underlines the need for property investors to protect their cashflow.

Westpac as well as the other large banks are under pressure to increase interest rates due to the fact that they borrow large amounts of money from overseas and in particular the USA where interest rates are rising.

The Federal Reserve in the USA has been increasing interest rates over the past year because of the threat of inflation posed by a surging economy and near full employment.

As a result, the official interest rate in the USA is now at 2% which is higher than Australia at 1.5%. For many years, official interest rates in the USA were lower than Australia.

Interest rates in the USA are expected to rise even further than this will have a direct impact on the borrowing costs of the big banks in Australia meaning that they will pass these costs onto local borrowers.

For property investors with a large number of investment properties, these out of cycle interest rate increases can eat into their cashflow and make it harder to service their loans.

Some investors may seek to take advantage of low fixed interest rates to protect themselves against rising interest rates while others may choose to refinance to lower interest rate products.

However, the ability for investors to refinance is now much more difficult due to stricter lending requirements being imposed by APRA on financial institutions.

The credit squeeze being imposed by APRA and the big banks means that it is much harder for people to refinance into more competitive home loans. They are effective prisoners in their own home loans.

For example, recent figures produced by Digital Finance Analytics (DFA) estimates that nationally some 31,000 households refinance applications were rejected in July which is an increase of 23,000 since August last year - a surge of 1248 per cent.

In such an environment, it is critical that property investors boost their income by ensuring that they claim all their legitimate tax benefits relating to property investment such as depreciation allowances.

It is estimated that only one in five residential investors make use of the tax depreciation entitlements which are available to all investors on all investment properties. For an average investor, these generous tax depreciation benefits can add up to thousands of dollars in additional cash flow each year.

Property investors who have a portfolio of investment properties should also realise that they can claim tax depreciation benefits retrospectively if they have not done so in the past.

DEPPRO has been able to assist property investors who have several investment properties achieve tax benefits of over $100,000 by claiming depreciation allowances for previous financial years.

The cost of a depreciation report as prepared by DEPPRO is around $600 and this is tax deductible and covers the lifetime ownership of the investment property.

Click the link below and complete the details to ensure your client receives a higher return on their cashflow.