This week we saw that inflation in Australia has once again started to tick higher and that has meant the big banks are now predicting that we could again see another increase in the cash rate from the RBA at the next meeting on Melbourne Cup day.
Three of the big four banks predict rates will rise by 25 basis points and markets are now pricing in a 60 per cent chance of that happening.
If rates do get hiked again, we are going to start hearing about homeowners who are now going to be selling as they have had enough of higher repayments. While no one likes to pay higher interest rates (I certainly don’t), it’s important to take a bigger picture look at the impact of interest rates on your overall position and also combine that with your long-term goals.
For example, let’s say you own a property that has performed well over the past few years. For a while, it was naturally geared, but now with the interest rate hikes, you are now going to be paying around $1500 per month out of your own pocket.
On the surface, that might be frustrating for a homeowner, especially if they bought the property when mortgage rates were around 2 per cent.
However, the same homeowner has also seen the value of his property increase by around $400,000 over the past few years. What we need to look at here is the net position. It’s clear that the property owner is well ahead.
Over a 12 month period the homeowner is forced to pay a little under $20,000 in interest. This is also before the tax benefits that come with having a negatively geared property.
Based on simple numbers, for the past 2 years, the homeowner would be well over $350,000 ahead.
By anyone’s standards, that is an incredible result. If you were looking at that on an income statement, you’d be pretty happy with the result.
Assessing that overall net result is the best way to make a decision on whether to hold onto an investment or sell the property. Selling the property just because rates have gone up is missing much of the big picture which is incredibly important.
So in this example, selling would be a mistake.
The other consideration that you do need to make though, is that you do only have limited servicibilty. When rates rise, that does make it harder to buy more properties. We are seeing this now, with homes harder to purchase because lending has effectively been cut back.
You also need to consider how you are going to cover these higher repayments. One way to do this is to simply pay it out of your earned income. However, you can also get a little more creative.
Another option is to use some of that equity that has been created and use it to cover the costs of the repayments.
One of the big frustrations of most property investors is that they do all this hard work and build a property portfolio and don’t get to see any of the benefits of it in the short term. If you’re a little bit more creative and find ways to access that equity you can have the best of both worlds.
You can have your cake and eat it too. That’s the power of creative thinking.
