How property investors should deal with rate hikes
Property investors are often taken aback by interest rate hikes from the majority of banks, but while it could definitely have an effect on one’s journey there are also ways to navigate your way through and continue on the path of successfully creating wealth.
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Several banks have enacted a round of rate hikes, and the past few years have seen historic lows with regards to exchange rates, cash rate, and lending rates.
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For investors who have tenanted properties, it could be as simple as “rates up, rents up,” but Smart Property Investment’s Phil Tarrant believes that it is important to consider all other aspects that might affect the growth of his assets.
Changes such as these rate hikes are always good opportunities to have a discussion with a reliable financial team, according to him.
“Like most things in life, I concentrate on things that I can control and I don't really concern myself too much with the stuff that I can't control. I can't control what lenders are going to do with interest rates—what they say goes and I've got to work within that,” Phil said.
“I do have certain mechanisms… to influence my mortgage. I can look to refinance it if I'm not happy with it. I can try to find cheaper rates somewhere else… or I could just suck it up and go, ‘All right, at the moment, my money's going to cost me this to lend, to borrow, and I'll just pay that out.
“Am I moving as my interest rates go up? Am I looking to increase my rentals? Sure, of course I am. I'll do that whenever I possibly can. But that’s really a dialogue with my property manager to say: ‘What's the appetite at the moment for renting in this particular area? Can I still get my rent without losing my tenants?’”
According to Phil, it comes down to working with numbers that he is most comfortable with, as well as having multiple buffers for the worst-case scenarios. His advice for fellow property investors is to stay within your comfort zone when it comes to “money matters”.
Phil explained: “When I look at my ability to pay my mortgages… [I ask myself], what can I spend if rates go up to this particular amount, and [if] am I going to be able to sleep at night and make sure I'm not going to be worried about money? That's my benchmark for everything. I don't want to be sitting there worrying about paying my mortgage. I want to know that I can do it comfortably.”
"When I look at purchasing property for investment, I look at what is my capacity to lend if rates go up...? I'll use the word a ‘contingency’ — rates are going to go up, rates are going to go down. As an investor, you need to be comfortable that should rates go up one per cent, two per cent, you're still going to be able to put food on the table,” he concluded.
Tune in to Ross Le Quesne’s episode in The Smart Property Investment Show to know more about property rate hikes, hotspots, and other factors that can ultimately affect an investor’s business of creating wealth through property.