Wednesday, 12th July 2017
Originally published on The Frontier Investor.
What goes up must come down… and vice versa. While former RBA board member John Edwards' recent predictions of up to eight rate rises over the next two years have caused alarm for property owners, his comments align with my own beliefs about where interest rates are heading.
We've been through a time of unprecedented low interest rates - and cheap finance - and it was never going to last forever. I've been talking to my own clients about preparing for rate rises of between 2-3% over the next couple of years, which mirrors Edwards' predictions.
As a buy and hold property portfolio strategist and specialist advisor, I'm prepared personally - as are my clients - to ride the wave of changing interest rates. It's one of the major reasons I advise property investors to hold a cash buffer against their investment properties, to make sure there's money around to cover any unexpected expenses.
Don't stick your head in the sand when it comes to your finances
While the banks will usually assess borrowers at a higher rate than what they actually approve, they won't always show you the actual figures. Ask for them. Make sure you know what would happen to your back pocket if you had to come up with an extra 2-3% on your mortgage repayments.
Nip excess spending in the bud before it's too late
If you've been stuck in spending mode and making the most of cheap credit, it's time to reel it in. Concentrate on protecting your income bearing assets, such as your property portfolio. It's this that will secure your future and provide a comfortable retirement, not the brand new car or overseas holiday.
Hold steady with major financial decisions
The worst thing you can do as interest rates rise is to get into panic mode and sell your investment, because it's still continuing to bring you an income. If your plan is to hold, make sure your bases are covered and that's exactly what you will be able to do. It's not worth missing out on long-term capital gains because you sold too early.
Assess your rental situation in the current market
As it's tax time, your portfolio will be currently under financial review by your accountant. Ensure that you look at your rental income and evaluate whether there's room for an increase. This should also take into consideration any rate rises or increased insurance premiums, then be adjusted in line with the current local rental market.
Start putting extra money aside from now
Ease yourself into the proposition of higher interest rates now by putting aside extra money to meet your proposed new repayments. For instance, if you calculate you will be paying another $400 per month on your mortgage, put it into a separate account and hold it there for when it's required. If you're struggling to find this amount, it will give you time to bring your spending back in line for when rates do actually rise.
At the end of the day, only you know what's needed to keep you afloat each month. Perhaps it's just time to consolidate your personal and investment finances. Often we earn more than we really think, but tend to fritter it away on items that aren't going to build us real wealth. Take charge now and there's no need for concern. It's just another stage in the cycle and we'll go through it all again in time.