Impact on home purchase
Should you purchase an investment property, your borrowing capacity will be reduced. This will initially move you further away from financially being able to purchase your next home (not closer).
This occurs for a number of reasons including:
- Almost all residential properties will be negatively geared from the moment of purchase, assuming you are borrowing the full purchase price plus costs, which means negative cash flow.
- Most properties take anywhere from 5-10 years to become neutrally or positively geared.
- Even if your investment property became positively geared, this does not automatically improve your borrowing capacity and ability to purchase your long-term home. This is because lenders factor in affordability at interest rates between at least 2.5% above the rate you are paying.
- Lenders also reduce your rental income by 20% or more to factor in holding costs and vacancy period among other risk based considerations.
This can be offset by income growth, property value growth, debt reduction and increased savings. How long that will take is always unknown. History suggests that a quality investment property will provide capital growth and income growth that will create wealth over and above purely savings or paying off a mortgage.
An investment property may be the stepping-stone to leapfrog you into a long-term home. It may even need to be sold when purchasing a long-term home.
Should your next decision be an investment, you should plan that a future home may need to be purchased in five years, and possibly up to ten years’ time subject to your lifestyle drivers, growth in your existing property values, rental and personal income.
A five year timeframe until purchasing your home may not be long enough to have received a strong capital growth and rental return on the property.
We never know the variables of the future, such as property value increases, rental increases, income increases and living expenses increasing. What we can do is make educated estimates based on historical results. It is vital to consider how will this impact your timeframe to purchase your long-term home.
David is the Founder and Managing Director of Property Planning Australia, author of ‘How to Succeed with Property to Create your Ideal Lifestyle’, co-author of ‘Property for Life – Using Property to Plan Your Financial Future’, co-host of the ‘Property Planner, Buyer and Professor Podcast’ and a widely-published media commentator. With more than 20 years of experience, David is passionate about educating others to make informed, and ultimately, more lucrative property investment decisions. David established Property Planning Australia in 2004 – with the vision to educate and empower Australians to make successful property, mortgage strategy and money management decisions. Property Planning Australia’s operations have earned acclaim and national industry awards for its unique fusion of property planning, education, money management, mortgage strategy and risk management. All supported by multi award-winning customer service.