After months of speculation, the Reserve Bank of Australia confirmed an increase to official cash rates – and hinted at the possibility of more movements to come.
We interviewed our Finance Team Leader, Caylum Merrick, to discuss what rising rates mean for investors, and the strategies to consider as an existing borrower.
1 – Should investors be concerned about the impact of rising interest rates?
Higher interest rates will raise the holding costs for investors with a variable rate loan. However, for some time now, banks have been assessing borrowers’ ability to service a loan at a buffer above the actual loan product rate.
Lenders have been assessing loans at a minimum 3% buffer above actual rates since October 2021. This means if you took out your investment loan in the last few years, your lender has already checked that your finances can comfortably manage interest rates of up to 5-6%.
Regardless, borrowers still need to understand how the increases will affect their monthly repayments to gauge whether they need to cut down on unnecessary spending that would have less of an impact on their finances in a low-rate environment.
2 – Which property markets will the cash rate rise impact most, and how might it impact investor preference?
Rising interest rates typically have the greatest impact for investors in the least affordable markets – essentially Melbourne and Sydney.
As a guide, let’s assume an investor purchased a $1 million property in Sydney using a 20% deposit and a loan for $800,000. If rates rise by 1% in a 12-month period, the investor is looking at an additional $8,000 in annual interest costs.
In a more affordable city such as Perth, rising rates have less of an impact simply because investors are more likely to have a smaller property loan.
While Perth has already become a location of interest amongst many investors as the market that is bucking the trend of cooling property values, this affordability may become increasingly important as rates rise further, making the market even more attractive to interstate buyers.
3 – What is your advice for established investors?
If you have an interest-only loan nearing expiry of the interest-only payment term, it is worth considering whether you want to refinance and re-set terms before rates rise further.
The boat may have sailed on super-low fixed rates, which have climbed from historical lows. That said, locking into a fixed rate does offer certainty of costs and cashflow. If this stability is important to you, I’d recommend speaking with a mortgage broker about the course of action best-suited to your needs.
Overall, we are still seeing lenders provide compelling deals for refinancers – especially where borrowers have 30% or more deposit for a property. Given the value growth we’ve seen lately, particularly across the Perth market, now would be a good time to review your equity position ahead of possible future rate rises.
4 – What is your advice for upcoming investors?
For anyone planning to invest in property, partnering with a broker always makes sense regardless of how rates are moving.
A broker can clarify your borrowing power, which lets you set a buying budget. And by identifying your loan repayments, they can help you get a clear picture of what your cashflow will look like.
We also advise investors to maintain a buffer of cash savings. This is simply good financial practice that allows investors to manage rate rises – or unexpected property costs such as unforeseen repairs.
If you have been sitting on the fence about getting into the market, it could definitely be worth moving now before rates – and property values – climb higher.
It’s worth pointing out that investors in the Perth market can be better placed to navigate rising interest rates.
In a number of states, including NSW and Victoria, rents can only be increased once every 12 months. This means investors in these states can wear the full impact of a rate hike for up to a year.
In Perth, by contrast, rents can be increased every six months, giving investors a greater opportunity to recoup an uptick in interest rates.
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