Australia has had an unprecedented opportunity in the last few years, some may even say 'once in a lifetime', to secure record low interest rates. Now that (hopefully) the worst of the pandemic is behind us and life gets back to normal, consumer spending tied with shortages across many industries has seen an increase in CPI. Whilst the media commentary of the last 12 months has been focussed on 'property prices' we are now starting to see more talk on interest rates.
Interest rates are a hot topic in the media and of course many homebuyers, investors and particularly first homebuyers get attracted to these types of articles. But are interest rates really such a big deal? To answer that we need to put things into perspective. The long term average interest rate for residential mortgages in Australia is around 7%.
Learning from long-term trends requires long-term data
According the the Reserve Bank of Australia, historical interest rates have tracked in a band of approximately 4.5% and 8% (with a period of approximately 8 months during which interest rates rose to 9.6% in August 2008).
This data includes historical home loan interest rates (variable interest rates) back to 1959. Rates exceeded 10% for the first time in 1974 and pretty much remained above 10% until 1995. In just 4 years, interest rates dropped from the high of 17% (January 1990) to the low of 8.75% (June 1994).
After a peak of 10.5% in 1995, interest rates reached a low point of 6.5% in December 1998.As you can see in the graph above, whilst interest rates do go up and down in short term cycles, they do so quite slowly. Long term trends, unsurprisingly, take a long time. So what does all this talk of interest rates mean for me as a property investor? The thought of rates rising may sounds scary to many, especially if you have taken out a mortgage in the last 1-2 years. For owner occupiers there may be some 'rate shock' as interest rates start to rise again, with less available play money that will need to go into the mortgage each month. Property investors with rental income will be less affected, however it is more important than ever to be reviewing your numbers and understanding your income and expenses - nobody is going to do it for you.
So, what should you expect?
My prediction is that Australia will see 2-3 interest rate rises this year, most likely in the second half of the year. But this does not mean huge increases. Just as rates dropped over time, it will take a while for them to rise and to start having an impact on your cashflow. Small increases by the RBA of 0.1% or 0.15% initially will prepare mortgage customers for, potentially more regular, 0.25% increases in the future. Of course this does not prevent banks and other lenders from increasing rates outside of the RBA increases which they have been known to do.
The reality is that as a property investor, you need to treat your portfolio like a business. Make commercial decisions, don't base your investment decisions on interest rates alone. As an investor there are dozens and dozens of factors to consider when making investment decisions. Yes, interest rates are important but they are easily overshadowed by a strong plan and strategy for long term wealth creation. Investing is a long term gig, and as such your interest expenses are simply a cost of doing business. Whilst I cannot control what direction interest rates go, or by how much, I can control the decisions I make in response to interest rate changes. Everyone knows the old saying "what goes up, must come down" but with interest rates, this applies in reverse too. Our record low interest rates wont last forever, rates will go up at some point, by how much we don't know and over what time frame we don't know but don't be surprised when they do.
And what should you do?
Now is the time to get your financial 'house in order', put aside some extra cash as a buffer, talk to your broker about your loans and ensure you are prepared for the inevitable. If you have been sitting on the sidelines waiting for the perfect time to get into the property market, now as as good a time as ever. This could quite literally be, a once in a lifetime opportunity to lock in some incredible rates to set your property portfolio up for the future.
If you're unsure where to begin, The Property Mentors can help. Our mentors have watched countless property cycles and invested through the highs and lows of the Australian property market. Contact us today to put in place a successful plan for your portfolio in 2022.
