Use this interest rate decrease to grow your property portfolio
On 19 March 2020, the Reserve Bank announced a 100 basis points (1%) reduction in the repo rate. Amazing news, right?! Then they announced ANOTHER 100 basis points reduction! That means a 2% drop in interest rates in less than a month!
If your money is lying in some fixed deposit account earning interest, it’s not great news. However, it’s phenomenal news for anyone with debt, but especially for property investors with significant debt backed by assets that are appreciating (good debt).
To put this into perspective, you will save R20,000 per year or ±R1,700 per month for every R1,000,000 bond that you have. If your investment property had a shortfall of ±R1,700 per month, suddenly you will have no shortfall at all! And if you had a surplus, your monthly surplus is suddenly ±R1,700 more.
But why is the Reserve Bank reducing interest rates so much? Well, their focus is price stability, i.e. to keep inflation under control. When inflation is under control, the Reserve Bank can reduce interest rates to stimulate the economy and economic growth. Many economists expect to see a further reduction in interest rates during 2020.
However, be warned, interest rates will probably increase in the medium to long-term. You need to be prepared by having cash reserves in place for your property portfolio. Build these reserves up by refinancing your properties and keeping those funds in your access bond, so you don’t have to pay interest.
How can you benefit from these interest rate reductions?
In our article, How The Property Market Will Look After COVID-19, we concluded that it is still worth investing during these uncertain times. We also discussed the current opportunities and threats to property investment. And with our free one-hour webinar, we discussed COVID-19, the Moody’s downgrade and how to structure your property portfolio. Download the recording for free here.
The decrease in interest rates would usually cause property price growth. However, the global and national uncertainty and the current economic challenges are creating fantastic buying opportunities for the short to medium-term. You will be able to buy good assets at excellent prices. And the lower interest rates also make it more possible to acquire and service the (good) debt on these assets.
At the beginning of 2020, we published an article, 5 Reasons To Build Your Property Investment Portfolio In 2020 Despite The Lows. This article is even more relevant now if you’re willing to take a risk and build while everyone else is running scared.