Economy, Finance ·

Rising interest Rates

Are you unsure if now is the right time to start or even continue your property investment journey? Are rising interest rates holding you back?  Whether you’re an experienced property investor, or just starting out, you’ve most likely heard about rising interest rates and how they may impact the property market.  

Interest rate increases in a nutshell
– interest rates increase because the RBA is attempting to manage inflation.
– It does this by increasing the interest rate it charges financial institutions.
– This means that the interest rate charged by lenders on various financial products, such as savings accounts, variable-rate mortgages, and personal loans also increases.
– This has the effect of making houses less affordable, causing property prices to go down.  

The average 1YR fixed mortgage interest rate is 6.69% and 5YR is 6.92% (Canstar – 10 August 23). The interest rate tends to be higher for investment properties than owner-occupier homes, as investors are generally viewed as riskier borrowers.

Importantly, there are more things to consider than just interest rates when considering investing in property:

Buy in the right areas

location, location, location – interest rates don’t always directly correlate to housing prices over the long term, nor do they guarantee price drops. And while, on average, there is a tendency for house prices to fall when interest rates rise, these drops are often minor corrections in the market. Major cities like Melbourne and Sydney might fall, but there are still plenty of suburbs and areas that will continue to rise, even when others start to fall

Borrow under capacity

t’s important not to max out your borrowing capacity, especially for those seeking their first loan. Many beginners will take out a huge loan for a negatively geared property (when the property expenses are more than your property income). This puts you in a vulnerable position when interest rates do rise, with repayments only getting bigger but the rental income staying the same. If you fall into default the banks will be reluctant to lend to you in the future

Keep cash buffers

Your cash flow is important. The impact of rising interest rates can be negated by ensuring that your portfolio contains positively geared properties that generate cash flow. Buying low-cost properties that have a strong rental yield can provide a substantial buffer to protect against rising interest rates. And in difficult times, it can always be a good idea to have a little extra cash on the side. Having a cash buffer can be a great way to offset any of the pressure you might feel from rising interest rates. Of course, the reason you got into property investing may have been to free up your finances, not face more restrictions. But saving some of that cash you’re making from a positively geared property can really protect you in the future

Consider your lending options

seek out the right lending options for the future climate. As wider inflationary pressures grow and interest rates continue to climb, many investors will seek out long-term fixed interest rates on their mortgages. It’s important to explore these lending options and get the best deal

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