In its first back-to-back hike in 12 years, the Reserve Bank of Australia (RBA) has raised the cash rate by a total of 85 basis points. Its aim is to ease the country off the emergency borrowing settings that were required to maintain the economy through the Covid-19 pandemic. 

Philip Lowe, RBA Governor said that the Reserve Bank board is committed to making sure that inflation returns to the 2 – 3% target and that households should be prepared for further interest rate raises. In a statement, he negated the possibility of a recession saying “It doesn’t feel like the precursor to a recession and interest rates, while they have gone up, they are still low. The cash rate is still less than 1% at a time when unemployment rate is at a 50-year low.”

Capital Property investment specialists have lived experience dealing with interest rate fluctuations. We can help you counter interest rate raises with cash flow properties. To learn how, book a discovery call with Capital Properties today.

On the go? Here’s 30 seconds of take outs:

  • The RBA has predicted further interest rate raises in order to achieve an eventual target of 2 – 3% inflation.
  • Inflation is predicted to reach approx. 7% by December 2022.
  • Although a concern to some already financially stretched homeowners & new home buyers, this may offer an opportunity for investors.
  • Rising interest rates means less competition in the property market & higher rental demand.
  • It also allows for substantial depreciation & tax breaks to circumvent inflation.
  • To counter interest rate raises, we recommend that you:

– Work out your cash flow position

– Make additional mortgage payments

– Top up your offset account

– Consider refinancing your loan

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How high will interest rates rise?

The RBA has warned to expect further interest rate increases. This is due to shortages in the labour market, rising petrol prices along with rising retail electricity and gas prices and of course global factors including supply chain disruptions due to Covid-19 and the war in Ukraine. Economists are predicting another 50-basis point rise in July 2022, taking the cash rate to 1.35%, although the forecast is for a cash rate peak of 2.5%, with inflation predicted to surge to almost 7% in the December quarter.

“High inflation damages the economy, reduces the purchasing power of people’s incomes and devalues people’s savings,” Lowe told the American Chamber of Commerce on 21st June 2022.

How do rising Interest rates affect the property market?

Rising interest rates have an obvious effect on buyers and sellers. If the economy shows strong growth, rising mortgage rates won’t affect property value and housing prices hugely. That’s because job and wage growth should compensate for the higher costs.

However, for people who’ve struggled to get on the property market or those whose finances are already stressed by record-high home prices, this may prove detrimental to their home-owning dreams. Property investors must therefore ensure they take proactive steps to counter interest rate raises before they find themselves in a pickle.

Rising interest rates and property investing 

Increasing interest rates/mortgage rates is often an opportunity for real estate investors. Rising interest rates leads to a reduction of buyer demand in the market, leading to reduced property prices and less competition. As less people qualify for mortgages, the rental market swells to meet demand for additional rental properties.  In some Australian capital cities, rents are rising by more than 20%.

The potential for higher rental yields has already driven investor mortgage demand, with the Australian Bureau of Statistics (ABS) reporting 9 consecutive months of investor mortgage growth since June 2021. also reported a steady increase in investor enquiries over the past 3 years, currently sitting at the highest level in years. And as international borders re-open, allowing students and skilled migrant workers to return, demand for urban rentals will continue to build.

Many investors will already have seen phenomenal levels of capital growth and will be prepared to run negatively geared property and cover a cash flow shortfall.

How to counter interest rate rises in a cash flow property

Investing in a cash flow property means you’re investing in a property with a high rental yield, i.e., with a rental income that’s greater than the expenses associated with owning that property.  Those expenses include maintenance, property management fees, insurance, mortgage interest and more. To increase equity and counter-interest rate raises, investors ideally want to pay down the loan on the property with any additional income, so budgeting is vital. Capital Properties Budget Planner can help with this. 

Increasing interest rates could affect cash flow for property investors, however, the effect should be diminished by increasing rental demand and higher rental rates. For example, the growth of populations in regional cities, such as Ballarat, in north-west Melbourne, Victoria and Newcastle in NSW shows no sign of slowing down with strong investor activity in these areas.

Many property investors embrace substantial depreciation and tax breaks to circumvent inflation. With vacancy rates below 1% in some markets in Adelaide, Brisbane, and Perth, investing for cash flow also allows for the excellent potential for capital gains.

How to counter interest rate raises

It’s worth remembering that banks and lenders have allowed buffers when lending to ensure that people won’t find themselves in an untenable situation. However, after enjoying historic low interest rates for years, some people may feel unprepared for the expected increases. 

If you’re wondering what you can do to improve cash flow and counter interest rate raises, here are our top tips:

– Work out your cash flow position

We’ve written about the importance of knowing your cash flow before in Getting to know your cash flow: it’s power to you!At Capital Properties, we’ve developed tools to help you work out how different interest rates, rental income changes and/or paying down some of your borrowings will affect your bottom line. 

These free Capital Properties investment tools and calculators, include a downloadableProperty and personal spending budget spreadsheet, a rental property calculator and so much more to help you accurately predict the cashflow position for your investment property or complete property portfolio. 

– Make additional mortgage repayments now

To counter interest rate raises, it’s a good idea to make extra repayments into your mortgage before the interest rates escalate further. If you don’t have a fixed loan, you can deposit a lump sum or make more frequent repayments. Or, you can add extra into your ongoing monthly repayments starting as soon as possible.

– Top up your offset account

Making extra payments into your mortgage offset account allows you to build a buffer. Ideally, you’ll only have to pay interest on the difference between the loan amount and the amount in your offset sub-account. This means you can pay the loan off faster and with less interest in the long run.

– Consider refinancing your loan

If you think your current lender’s interest rates are higher than they ought to be, it’s worth looking around and getting comparable quotes. Once you’re armed with that information, you can pick up the phone and ask your lender for a better deal. If you’ve been a good customer, making repayments on time and have built equity in your property, you’ll have a strong position to argue from.

If your current lender refuses to negotiate, then it’s worth considering switching to another lender who’s offering better rate. Some lenders have investor incentives allowing you to package investment loans with home loans.  

The Capital Properties team are property investment experts who are passionate about helping you develop a wealth building strategy. We’ll help you navigate the challenges of property investment so that you’ll always feel empowered to make the right decisions for your financial future.

Book a free Discovery Session today and let’s get started.