Interest rates are on the rise. Find out how this is affecting property investors and what you should do about it.
One thing that’s now a common occurrence in Australia is interest rate hikes.
This phenomenon is spooking a lot of property investors, in particular. And it’s also putting the heads of homebuyers in a bit of a spin.
The reason why interest hikes are making property players uncomfortable at best is that most of us haven’t really gone through a rate rise.
But now that interest rates might continue to rise, it’s time to address the issue and ask the important question:
Is interest rate hikes something that we should continue to be concerned about?
Effects of Rising Interest Rates on Homeowners vs Property Investors
Let’s first dispel some rumours because there are many things being said in the media that are absolutely not true. It is still ridiculously hard to buy properties in the places where it is worth buying properties. And buyer activity is so high.
From an investor perspective, nothing has changed.
So, how are interest rate hikes affecting property players?
For the most part, interest rate rises affect homeowners more.
See, when the interest rate goes up, the rate at which you’re going to be assessed about your ability to borrow also goes up. This makes it harder for people who are trying to enter the market as a homeowner.
Now, given that we have a housing shortage in Australia, both factors then drive more potential homeowners to just continue to rent. This then puts more pressure on the rental market, which drives up rents.
In other words, if you are buying to invest, this actually works in your favour.
But what if interest rates suddenly drop? Is this disadvantageous to property investors?
Not quite. Because when interest rates fall, rents stay the same.
In fact, rental prices will continue to go up, but not as fast as before. At the same time, a lower interest rate environment will become a prime opportunity for more investors to be able to enter the market or grow their portfolios.
But of course, even if interest rate hikes don’t really affect property investors that much, that doesn’t mean you shouldn’t prepare for it.
So, here are three strategies you can adopt to ensure you can make the most out of a high interest rate environment.
The 3 Best Strategies
Strategy #1- Review your portfolio
The first thing you need to do during a high-interest rate environment is to review your portfolio. So, speak to your broker and check your portfolio’s interest rates, for starters.
During this time, there are a lot of incentives to refinance. There are also plenty of incentives for you to go back to your bank and get your broker to negotiate on your behalf. In fact, it’s best to ask yourself this question: Are you still getting the best deal for yourself?
One more thing: Look at your portfolio and determine if you are already maximising your money in the best possible way.
Yes, there might be a rising interest rate environment. But we often see a lot of clients who’ve got their owner-occupied debt. They’ve got two or three properties, and they’ve got it all on principal and interest repayments.
Let’s say you’re the same. Do you think that’s maximising your portfolio or your cash in the best possible way?
Well, we would normally say no to that.
Your accountant would say no to that as well.
Because ideally, you want to be paying down that non-deductible debt. Meanwhile, that home loan for where you live is the debt you ideally want to be paying down. And whilst you have that debt, you want your investment portfolio on interest-only on most occasions.
Strategy #2- Tune out the media
When it comes to the real estate sector, the media says one thing. But the truth is typically the complete opposite. That means most of it is a mindset game.
Property investing is a game of finance. But success in property investing is all won in the mind, right?
That’s why you need to learn how to navigate and think about the environment. You need to make decisions based on facts with solid evidence. Doing so will dictate how successful you are in life and what your future looks like when it comes to property investing.
Hence, you need to learn how to cut through the noise and have a really good mindset. Especially when we’re going through this period.
It’s true that this is a period that can be particularly scary for most property investors. But the more you know, the more prepared you will be to face it.
Strategy #3 – Look for opportunities
Where are you in your property investment journey?
You could be in the accumulation stage…
You might already be in the exit strategy stage or even the pay down debt stage…
But you need to know where you stand to find the best opportunities that suit your needs.
Frankly, this high interest rate environment is perfect for those trying to accumulate properties to add to their portfolio. All the smart money is still buying.
This is where professional investors come out while mum and dad investors are pulling back. After all, the former know that this is when they’ll be able to nab some good bargains and reap the benefits in 2, 3, or 4 years’ time.
Another point is that there are literally incentives now for first-time buyers.
But the fact is due to a shortage of supplies, house prices are going up. So, people are now putting their handbrake on building house prices. And this puts pressure on the supply issue.
But in turn, you get that growth as a property investor.
Every investor’s circumstance is different.
But now, you know that you don’t have to be alarmed by what you’re reading in the media about interest rate hikes. After all, the situation in Australia now still presents a good buying opportunity for property investors.
In fact, this is a great opportunity for you to lay the foundations of your portfolio so you can reap the benefits 5 or 10 years down the road.
Just be sure to follow these simple strategies, and you’ll make the most out of this unprecedented situation.
Keen to explore your own property strategy?