The Reserve Bank of Australia (RBA) lifted interest rates last week, increasing the cash rate to 3.35 per cent.
It was the ninth consecutive rate rise and means interest rates have increased 3.25 per cent since May 2022.
For borrowers on variable rate home loans, it means an interest rate of 5.25 per cent compared with 2 per cent this time last year.
Interest rates are an important variable for property investors (and investors more broadly) to manage.
No surprise then that data out today shows record levels of refinancing, as owner-occupiers and investors alike switch lenders, as all banks and in particular the big four compete for customers.
Here’s the two things you can do right now to manage interest rate risk.
- Keep your bank honest
The RBA publish data every month which compares the interest rates paid by existing borrowers, to the interest rates offered to new customers.
Existing customers are paying an average of 0.5 per cent higher interest rates than new customers.
We can’t control what happens with interest rates, but we can control whether or not we are paying a higher interest rate than we need to.
Look up what your bank charges new customers, ring the bank up and try negotiating a better rate.
Failing that, reach out to a broker and see if another bank will value your business more than your current bank.
- Observe but don’t obsess
It’s important to have the right mindset; observe but don’t obsess over interest rates.
The RBA cash rate should normally sit between 2 to 3 per cent, meaning investors should normally pay 4 to 5 per cent on their home loans.
We are right now in the midst of getting back to ‘normal’.
Interest rates were effectively 0 per cent during the pandemic, a period of just over two years (March 2020 to May 2022).
With the benefit of hindsight, interest rates were kept at 0 per cent for at least six months longer than they should have. As a result, the RBA is having to increase interest rates higher than ‘normal’ to catch up on lost time.
Investors shouldn’t expect interest rates to stay this high forever, just as they shouldn’t expect rents to increase by 10 per cent forever.
Have a buffer in place to see out the next six months, but at the same time get yourself in a position to prosper on the other side.
Last week I explained that real estate prices have increased from $175,000 to $1,025,000 in the last 30 years.
This is despite there being a recession, 9/11, global financial crisis, Covid (another recession), interest rates at 9 per cent and unemployment at 7 per cent, all in that time.
Interest rates might keep going up, they might not, but what is certain is that at some point they come down to ‘normal’.
When that happens, I think we will see another surge in house prices in some parts of Australia.
How can there not be?
We don’t have enough houses, and we are going to be bringing in another 250,000 people each year from overseas to fill jobs and grow the economy.
Whether you are a first home buyer or thinking about buying your first investment property, persistence right now will pay off in the end.
Don’t miss the big picture by getting stuck in the detail and negative media clickbait.
