Homeowners and property investors got an immediate boost to their cash flow after the Reserve Bank of Australia slashed the cash rates by 1% to 3.25% on Tuesday.
If passed on entirely by the lenders, this would bring about $20 a week before tax for every $100,000 mortgage against a property. So, a property with a loan of $200,000 will have an additional $40 a week before tax in the hands of the investor.
According to Margaret Lomas, founder of Destiny Financial Solutions, the extra savings will help close the gap between income and expenses when the before-tax cash flow is negative. When the before-tax cash flow is positive, however, the net increase to your cash flow will be discounted by your marginal rate of tax - so a 30% taxpayer getting an extra $40 will benefit from this by $28.
"The bottom line is that all investors will get an immediate boost to their cash flow, and some investors will find that their property's previously negative cash flow becomes positive. With the reappearance of property with more positive cash flow, investors should have more confidence about investing in a market in which - while values won't increase anywhere for several years - at least you have the cash flow required to stay in it and wait for growth to begin again."
Bill Zheng, CEO of Investors Direct, said the rate cut may trigger many tenants to consider buying instead of renting.
"Together with the First Home Owner Grants, we may see property for sale in the $250,000-350,000 range start to pick up in the coming months. Another effect it will have is to stop a lot of property investors selling their investment properties when their cash flow turns neutral or positive, especially when they are anticipating more rate cuts to come in the near future."