Why neglecting interest rates can be deadly for an investor
The COVID-19 era has frequently been described as “unprecedented”, and while many of the defining events of this time — as well as its ramifications on the property market — are without parallel, that doesn’t mean we can’t look to the past for some insight on how to proceed.
On a recent edition of Investing Insights, host Phil Tarrant sat down with the directors of Right Property Group, Steve Waters and Victor Kumar, to discuss how investors can ensure they’re making smart property decisions in the midst of the buying frenzy that defined 2021 and looks set to continue.
According to the trio, the most important thing is to make sure you know your numbers.
Mr Kumar explained: “Look, we can take lessons from the past, right? So, we can take lessons from the GFC and immediately as we came out of the GFC, people were quite a bit like bull at the gates buying properties left, right, and centre because finance freed up.”
According to him, it’s a similar level of momentum to that seen across the country right now, and it carries with it the risk of getting lost in the hype.
“This is where a lot of people did get financially hurt. The reason being that they were chasing a quick dollar, and not addressing the true fundamentals of property investing, and going and jumping into areas where there was media-focused growth,” he said.
“The same is likely to happen as we emerge out of COVID. A couple of things need to be kept in mind; one is obviously that everyone is doing their sums right now at the current interest rates.”
Mr Kumar said that investors could easily run the risk of getting themselves into hot water if they’re looking only at the current low-interest rates and not accounting for a change to those figures.
“As part of your normal finance cycle within your portfolio, you go from interest-only to your standard variable rates as part of your mortgage setup when the interest-only period ends. If you’re absolutely redlining yourself in terms of your borrowing limits right now, and not taking into account that lending is changing and will change, it can hurt you in the medium- to longer-term when your loan turns from interest-only to principal and interest, with your payments increasing,” he said.
Mr Kumar stressed that smart investors should be accounting for the somewhat unknown aspects of the future and not being over-exuberant by accumulating multiples of properties without doing those sums first.
Mr Waters agreed. “I’d also add that if you’re at circa 3 per cent today and you’re doing those numbers at 3 per cent, if you get caught at 4 per cent within 12 months, well, then something’s dramatically gone wrong in your ability to monitor your own situation and your portfolios,” he said.
Doing your numbers based on the lowest rate possible as a point of survival is crazy, Mr Waters opined. But he noted that you can also swing in the other direction, being too negative in your own capability and situation if you’re always predicting rates at 5 per cent.
While he acknowledged the statistical average is 5 per cent, he noted that accounts for massive highs when interest rates climbed as high as 20 per cent, which drag that average up.
“It’s a different world today, massively different,” he said. “So too will today’s long-term low rates drag that average down,” he added.
His advice? “Be aware and monitor.”
Listen to the full conversation with Steve Waters and Victor Kumar here.
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