As we all know, last week, the RBA announced that interest rates would be officially rising by 0.25 per cent, making the cash rate 0.35 per cent.
This is the first increase since interest rates were slashed to an all-time low of 0.1 per cent because of the pandemic.
While interest rates rising is overall a positive outcome, as it’s a sign of a recovering economy, this change will significantly impact everyone who owns the property, either as an investment or their PPOR (principal place of residence).
The rate hike also presents an excellent opportunity for those investors and home buyers savvy enough to take advantage of the temporary downturn in property prices and get better value.
The increase in interest rates will lead to a decline in property prices, and we’re already starting to see the market cool-off. Potential buyers will be more likely to find a property for a bargain price, making their mortgage repayments more affordable, even if you’re paying a higher interest rate.
It all comes down to strategy. To invest like a real pro, you need to understand why you decide to invest. Many of my clients come to me without a strategy as a buyer’s agent. They don’t know where or what to buy, and they underestimate how much a property will cost. For every client who walks through my door, the process starts with examining their short-term and long-term goals and devising a realistic strategy to achieve them.
My property journey started when I was 28 by buying a one-bedroom flat on a teacher’s salary of no more than $70,000 per year. Through careful planning and perseverance, almost 20 years later, I’ve managed to build up my portfolio to 18 properties worth $15 million. My success is proof that with the right strategy in place, anything is possible.
If you’re planning to invest in property during the current climate, a key part of your strategy should protect your portfolio against increases in interest rates. I would strongly recommend that all investors do the following:
Have a cash buffer: It may be tempting to spend all your savings on the deposit when you buy a property. However, you must always ensure a cash buffer set aside to mitigate against any unexpected expenses, such as increasing interest rates.
Focus on cash flow: This is a strategy that I discuss in-depth in my new book Buy Now. Look for positively geared or positive cash-flow properties in regional areas with lower price points and strong rental yields. This will always have a substantial buffer to protect against rising interest rates. An experienced buyer’s agent or local real estate agent can help you source high cash-flow investment properties outside of the major cities or in a different state if you’re unsure of where to look.
Use an offset account: With interest rates on the rise, it may be tempting to lock in a fixed loan for your mortgage. However, it’s important to remember that you can’t beat the banks at their own game, and they’ll always know more than you. I would recommend getting a variable loan and using an offset account to lower your interest. Placing any spare cash you may have into the offset account, including any equity you take out of the property down the track, will help to lower the amount of interest you’re paying substantially. What’s more, the money in your account will be growing at the same rate your interest is set at.
Borrow under your capacity: Another mistake rookie investors will make is they’ll max. Out of their borrowing capacity on their first go, they are taking out a huge loan on a negatively geared property. This strategy puts you in a position to face potential mortgage stress when interest rates go up. Still, it may also hinder the growth of your property portfolio, as banks will be reluctant to lend you any more money unless you are a very high-income earner.
Refinancing: If you already own a home or an investment property, and you’re worried about how you’ll be able to afford the interest rate increase, you could always try refinancing your loan with a different bank. You’re more likely to get a better deal on interest rates by switching to a new bank rather than staying with the bank you’ve always been with.
Building up a thriving investment property portfolio and becoming financially free will take a lot of hard work and perseverance, but it is possible, even in 2022. The investors who are prepared and have the right strategy in place will be able to weather the interest rate rises easily.
This post was aggregated from Dynamic Business (https://dynamicbusiness.com).