Can I afford to be an investor if interest rates rise?

I don’t think anyone you speak to would dispute that interest rates are at an all time low and that as our economy recovers interest rates will return to a ‘normal level’. The million dollar question is where is that ‘normal level’? If you look at interest rates over the last forty years you will begin to see the volatility of this space ranging anywhere from 5% to 17%. With an average over the forty years of around 8.5% and most economists predicting multiple increases totaling at least 2.5% over the next few years, anywhere within that range seems like as fair a bet as any.

The question on many people’s lips is if I extend my debt position now will I be able to hold my portfolio when the market returns to its ‘normal level’?

It is in response to this question that some people make the decision to fix in their debt, at least now knowing that their repayments won’t be changing for a set period of time. History does however show that those that ride the waves of variable are better off in the long run. This is where a redraw or offset facility could come in handy. You could simply calculate your payments based on an interest rate you are comfortable with long term, say 8.5%. Putting this amount into your loan or offset facility each month would allow a surplus to build up during the lower times and give you somewhere to dip into during the higher times.

You need to also realise that when a bank lends you money they assess your ability to repay the debt. As we know banks are generally quite conservative and therefore they use sensitivity when establishing what you can afford. When assessing your loan repayments they will often do this at 1.5% above what you are actually paying. When taking your rental income into consideration they generally only use 75% of what you are currently being paid. So as you can see the bank is ensuring that when there is a change in the market for the worst you can still make your repayments.

It’s also important that you understand the position you are in now and where you want to be in the future. Unfortunately we can’t predict all of life’s twists and turns however we can take the steps to ensure that we are making educated decisions at the time and thinking down the track.

One thing I always recommend to my clients is to have a ‘buffer’. This is a surplus of cash or borrowed money put away for a rainy day. Many of our clients use the strategy of unlocking equity to fund that next investment, all we do is ensure that we borrow that little bit extra to tuck away. This is where you go if the council rates all come in at once and you haven’t put enough money away, or if you’re having to pay for repairs whilst waiting on reimbursement from the insurance company. This ‘buffer’ will bring life’s surprises back into your control and save an adverse effect.

So as you can see with a little forward thought and planning it is possible to reduce your risk in property investing. This is where a Finance Strategist brings value to the table over your every day mortgage broker. They can ensure you are considering every aspect of your investment journey. If you haven’t already, take the time to talk to one of our Strategists you will soon discover if they have something different to add.