If you’re a homeowner, or even if you aren’t, chances are you will have got wind of the recent RBA interest rate hikes. 2022 has seen the fastest rise in property interest rates in two decades, which sees many property investors wondering how this will impact their portfolios.
While an increase in interest rates is likely to mean higher repayments for investors with outstanding loan obligations, it can also present an opportunity. Now is a great time for investors to review their investment strategy and plan to remain on track to reach their investment portfolio goals.
Why we’re seeing a rise in interest rates
There are a few key factors that have contributed to the recent rise in interest rates. Primarily, the Reserve Bank of Australia (RBA) has lifted the official cash rate twice this year, in an effort to tame inflationary pressures in the economy. Inflation is currently sitting around 5.1% and may reach as high as 7% by the end of the year, before an expected reduction in 2023. Raising interest rates is the fastest way to curb inflation, which is leading to an increase in the cost of borrowing for Australian homeowners and property investors.
The reasons for inflation are a little more complex, with a range of factors appearing to have contributed to the current circumstances. With the ongoing impact of global events such as COVID-19 and the war in Ukraine disrupting international supply chains, there have been fewer imports and a surge in price for locally-available goods.
In the corporate sphere, many smaller competitors have dropped out of the market or been absorbed into bigger corporations over the past couple of years, leading to reduced market competition and an increase in profiteering.
Finally, ongoing natural disasters around Australia over the last few years, from catastrophic bushfires and widespread flooding, have also seen agricultural industries impacted. These have led to a shortage of fruit, vegetables and other consumer staples, which have contributed to rising inflation and rising interest rates.
Fear in the market
Right now there is a lot of “noise” in the market, whether it be from protective parents, nervous neighbours or mainstream media commentators. In some circles, emotion is running high, which can lead to hasty short-term decisions that have bigger consequences in the long term.
Property has always been considered a very stable asset class in Australia and it’s important to consider a balanced view before allowing these changes to put a halt on moving towards investment goals.
Mark Bouris, founder of Yellow Brick Road Home Loans, recently weighed in on the public debate about whether interest rate rises would continue unchecked:
“I would say this to all Australians: don’t panic! There is no way in the world, in my opinion, that we will get a 3% increase in interest rates, because if we continuously raise interest rates, we will pull property prices back so much that the whole country is going to put their hands in their pockets and stop spending. The reserve bank is not going to put us into a recession; they’re not going to take that risk.”
The impact of rising property interest rates
For those with variable rate loans, the increase in interest rates will immediately start to eat into your profits. And for those with fixed rate loans, while repayments won’t go up straight away, some may find it harder to refinance home loans at a lower rate when the current fixed term expires.
For those thinking of buying an investment property, the recent higher interest rates have also been seen to increase borrowing costs. This means home buyers will need to factor in a higher mortgage repayment when calculating potential rental income and capital growth. Typically lenders factor in an additional 3% above the current cash rate when approving loan applications. This provides additional protection for the lender by ensuring borrowers have the capacity to absorb rate rises.
Good property deals on offer
The good news is that there are still plenty of good deals to be had out there. And with interest rates still relatively low by historical standards, now could be a good time to snap up a bargain before prices start to rise.
Remember that rising interest rates are just one factor to consider when it comes to property investing. Market cycles, location, asset selection and market timing also need to be weighed up. Being aware of the potential impact of rising rates and factoring it into investment strategies means savvy investors can still secure a successful property investment deal.
Rental vacancy rates are still at almost historic lows across Australia, meaning the demand for housing has never been higher. By investing in property, the opportunity arises to provide secure, stable housing for someone else while providing an opportunity to achieve equitable growth and reasonable rental returns.
Responding to interest rate growth
For those thinking of investing in property, be sure to conduct research and speak to a mortgage broker to get the best financing deal. And for current property investors, be sure to have a buffer in place to cover any potential interest rate rises. For those able to, making additional repayments may also provide further peace of mind by reducing the amount repaid in interest.
No matter what, it’s important to factor in the higher interest rates when doing sums to ensure a good return on investment.
Have you or your clients been affected by the higher interest rates? How are you dealing with it?
ALC currently have a great range of great House and Land Packages that could be perfect for your clients. Reach out to our team today for more information, or take a look at our unique made-to-order investment property service!
Disclaimer: This article contains general information only. It does not take into account your personal objectives, financial situation or needs. Before making any decisions, consider your personal circumstances and seek professional advice.
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