Proof that Property is a Relatively Safe Investment
Being in business is often about risk management. If you’re in business and invoice a client you know that a small percentage of your customers won’t ever pay up – and your pricing will generally allow for this. You need a higher return to reflect your risk.
Other businesses do this as well. One of the clearest examples of risk management is the insurance industry, whose profits rise and fall on their ability to manage the inherent risk of a claim. That’s why they ask so many questions before you can take out insurance with them. Each question is designed to measure the risk and determine the premium needed to allow for profit. The greater the risk the higher return that is needed to compensate.
Nowhere is this more tangible in the insurance industry than health insurance. If you are a smoker you will pay a premium about double of what a non-smoker will pay to reflect the increased chance of dying prematurely. Instead of declining insuring smokers altogether, health insurance companies price their risk rather than eliminate it. They know that a significant percentage of smokers will still live a long and healthy life and their higher priced premiums will cover for those who claim earlier. This basis of covering their risk ensures a healthy profit – perhaps even higher than they earn on a lower premium non-smoker. The bottom line? Smoking is really bad for your health and life insurance companies estimate their risk insuring smokers as double than insuring non-smokers.
So, what has this to do with the lending industry? Much like insurance, lenders don’t want to eliminate risk, they just want to price it correctly. They are happy to charge a premium, or higher interest rate, on those loans which represent a higher risk – confident that the increased return on the repaid loans will provide more than enough profit to cover the ones which default. This is how they justify the higher interest rates charged on unsecured credit card debt and personal loans. They know their risks of repayment will be the highest in these areas.
By contrast, low risk areas for banks have a correspondingly low interest rate that reflects the comfort and security they feel from lending in that area – and for many lenders that area is property. In fact, they are so comfortable with their low level of risk in this area that some will even lend up to 97% of the value of the property and all offer an interest rate that is the lowest they offer of any other loan type. Of course interest rates aren’t the only thing you should consider when borrowing – but as a reflection of the perceived risk this one sector of the lending market has the indicators are very clear. Lenders perceive a much lower risk to property than any other form of investment.
It seems clear that the highest risks for lenders carry the highest interest rates – and accordingly the rates they charge reflects the security they have for the lending they are doing. Therefore, if large lending institutions, who cannot afford to neglect the pricing of risk, provide billions of dollars annually at low single digit interest rates for the purposes of investing in property, then that provides a very clear pointer as to what they believe represents the safest form of investment on the market. In fact, no other type of investment loan can come even close to achieving the low interest rates that lenders are ready and willing to offer the property market.
So, what does this mean for you? If lenders, which have a wide view of the entire market and all its lending possibilities, see property as the safest form of investment, then it should definitely be a key part of your investment portfolio. Talk to our team today and we can source and negotiate a property investment loan that reflects the circumstances that are right for you.