Interest Rates – what will they do?
Boz takes you through a strategy to ensure that when interest rates go up, you’re protected.
RBA Minutes can be located HERE.
Hey everyone. Boz here, from OpenCorp for today’s Property Wealth WOD. Well, we have a few questions to answer today. Will they go up? How can you prepare? What does a rise mean for you? What are we talking about? Interest rates, of course, that old doozy. It’s a question we get every day, and so we know it’s top of mind for most investors out there. Okay?
Will they go up? That’s a really easy one. Yes, they will. They’re at record lows, they can’t stay at record lows forever. With some of the conversations I’ve had with senior executives, funders, private bank departments of the big four banks, in the last couple of weeks, they’re definitely forecasting that rates will go up. So let’s be practical about it, and understand what you can actually do to prepare for those things, okay?
First is buffers. Make sure that you’ve got a buffer there to be able to cover any increased costs, if you can’t cover those costs from your cash flow, okay? Anyone with property in Sydney or Melbourne, that’s held that property for over 12 months, will have some equity in that property. Have a look about going back to your bank and setting up a small buffer to cover those increased costs. Fixing. You never want to fix your interest rate to try and beat the bank because there are people far smarter than me, and most of us working within the bank. They’re not offering you a fixed rate as a charity, they’re making money on that.
But what it does give you, are two things. Surety of repayments over time, and people like certainty. The second thing that it does is allows you to cap affordability. So let’s say that at some point in the future rates were at 6.4%, and they were threatening to increase to maybe 6.6%. You could afford 6.4, you couldn’t afford 6.6. Lock it in at 6.4, and at least that means you’re knowing that the loans are at a rate that you could afford. But we don’t see them getting that high in the short term, anyway. Okay.
Loan review. Really good time. Most people set up a loan, and they never ever think about it moving forward. A really good practice to consistently assess the loan, review it, is it the right loan for your circumstances? Does it have the features that you need? And basically is it fit for purpose, for what you’re requiring. And if interest rates are going to be going up in the near future, then there’s every chance that the loans that you’ve got today, and how they are set up, may or may not be right for your situation. So undertake that review, brokers will do that for free. Give you some guidance on what the options are, and you’ll feel a whole lot more informed, and a whole lot less anxious as a result.
Finally, purchase smart. Okay? If you’ve got an expensive property that you’ve bought, with a big mortgage on it, then you’re far more susceptible to a large impact on your cash flow even if the interest rate rise is small. If you’ve bought at an affordable level, then obviously that impact is much smaller because the loan amount is much smaller. So prevention is better than cue are here, as well. Just by being smart about what you invest in, and how you make sure the holding cost day one, even in a low interest rate environment, is very low so that you can absorb some small increases as interest rates go up.
Remember though, as interest rates go up, right, rents will increase as well over time. So what does it mean for you? Well, typically when interest rates go up, at least the cash rate from the IBA, that’s the sign of a positive economy. We created the most number of jobs in Australia, of any year in our history, last year. Unemployment is low. Labor force participation is up. So instead of rattling off, I guess, the whole summary from the Reserve Bank of Australia, click in the link that we’ll include in this post, and it will give you a really good, succinct summary from the Reserve Bank of Australia. Minutes that came out in the last 48 hours, okay?
So what it means for you, is just remember what drives interest rates up, and it’s based on a positive economy, positive working conditions, and a strong labor market, and a strong economy, okay? So those things are generally conducive to property prices rising, as well. So you only have a small period of time where you might need to absorb some increase. You can have your buffer to protect that, and as the property price rises, you can increase that buffer to be able to accommodate anymore interest rate rises from that point forward.
Hopefully you found that useful, guys. Buffers are key, review your loans, buy smart, don’t stress out. Interest rates cycle just like everything else, but there are some sure fire ways that you can protect yourself, and make sure you’re sleeping at night. Invest safe, and we’ll see you next time.