Interest rates have a major impact on your property investment portfolio and are currently at 50-year lows as you can see below. This creates a tremendous opportunity for investors but should also be considered a chance to prepare. What goes up must come down and what comes down, must eventually go up again.
Here’s how interest rates affect your property investment.
|LOW INTEREST RATES vs HIGH INTEREST RATES|
|The economy is stimulated, and spending is encouraged.||The purpose is to curb spending and get inflation under control.|
|Higher demand for property and thus, property price growth, i.e. capital growth on your investment.||Reduced demand for property resulting in poor property price growth.|
|Reduced demand for renting.||Stimulated demand for renting.|
|Places pressure on rental escalations because more people can afford to acquire property.||Increases rental escalations as property becomes less affordable.|
|Lower bond payments, which usually make up for the negative rental effects.||Higher bond payments eat away at the increased rent.|
|Difficult to find bargains due to the higher demand.||Easy to find bargains due to the lower demand and people selling their property.|
It is thus critical to build up reserves in a low-interest-rate environment and not spread yourself too thin. You can even refinance your properties and keep that capital in your access bonds as reserves. We discussed this principle in our previous article, 5 Points to Keep in Mind when you Refinance Property.
If you are prepared for high interest rates, you can acquire bargains (far below market value) if you have sufficient capital. In our previous article, Ready, Set, Negotiate, we discussed how you can buy property below market value from sellers in financial distress, which is often caused by high interest rates.
Many economists don’t expect interest rates to rise anytime soon as the global economies are trying to revive themselves. Still, at some point, interest rates will increase again, and you need to be prepared for it.
So, then the question remains, should you fix your interest rates during this time? Remember, when you fix your interest rate, it is at a higher rate than the current variable interest rate, so if interest rates don’t increase, you end up paying much more. It is also good to remember that you are competing against some clever banking analysts…
The benefits of a fixed interest rate are certainty and protection against interest rate hikes. It’s like getting insured against future interest rate increases. But it comes at a price (and sometimes a hefty one). So, ask yourself if it is worth the price.