Recent rate hikes from the Reserve Bank of Australia have already driven mortgage repayments sharply higher for millions of property owners around the country.
With the big four banks expecting the official cash rate to rise above 2-3% by the end of the year, many Aussie investors have already begun to look for ways to manage further increases in their mortgage repayments that are over the horizon.
Angus Gilfillan, CEO and co-founder of digital-first mortgage broker Finspo explained why property investors are starting to feel the pinch of rising interest rates.
“Rising interest rates can seem a bit daunting. Increased interest costs at the same time as predictions of falling house prices is not the Australian dream that property investors had in mind when they entered the market,” Mr Gilfillan told Your Investment Property.
“The reality is higher interest rates often mean higher repayments for property investors on variable rates. Materially higher interest rates could also have an impact on property prices. These two factors combined are creating some concern with certain property investors.”
Fortunately, there are plenty of strategies investors can adopt to combat rising interest rates now and in the future.
1. Know your interest rate
“Lenders may not tell you when your personal rate is changing, and it has a huge impact on your interest costs and cash flow,” Mr Gilfillan said.
“Rates for customers can vary a lot. The Australian Competition and Consumer Commission found that in December 2020, borrowers with loans between 3-5 years old were paying 0.58% more than the average rate for new customers. This increased to 0.71% for borrowers with home loans between five and 10 years old.”
By understanding your interest rate and monthly repayments, you can correctly assess your outgoings and determine whether the rate you have with your current lender is the best on the market.
Mr Gilfillan recommends logging onto your mobile banking app or accessing your home loan statement to view your current rate.
2. Make extra repayments
If you’ve got the wiggle room to make extra monthly repayments into your mortgage, you can save yourself hundreds or thousands of dollars in interest while reducing the duration of your loan.
ANZ commercial home and investment lending manager Daniel Smallwood explains how extra repayments can benefit investors.
“Making extra repayments allows an investor opportunities to pay ahead and build redraw into their loan. It allows them to create equity sooner which is why they have the means to engage in further lending,” Mr Smallwood told Your Investment Property.
If applicable, there is also the option of depositing lump sum contributions (when they come along) into your mortgage such as tax refunds. It’s an easy way to offload money into your mortgage.
Investors are reminded to confirm with their lenders about the conditions that may apply regarding extra repayments. As a general rule, variable rates usually allow for extra repayments whereas fixed rates may incur fees after reaching a particular additional repayment figure.
The moral of the story, chip away at your mortgage now if you have the chance.
3. Consider refinancing your loan
If your current lender’s interest rates are higher than others out there, it may be worth calling them and asking for a better deal.
If they aren’t willing to budge, think about switching to another lender with a more competitive rate. Ultimately, you want to take advantage of the rates that are currently hot on the market.
“Loan structure and repayment type can make a big difference when it comes to investment properties,” Mr Gilfillan said.
“Leveraging existing equity to reduce your loan to value ratio often means you can get a lower interest rate.”
Before you hop on the refinancing bandwagon, Mr Gilfillan suggests discussing your plans for an investment property with an accountant as “they have all the expertise regarding the tax implications of different strategies.”
4. Build a buffer in your offset account
If you have a mortgage offset account, now is the time to make extra payments into it.
Essentially, you want to make sure you have plenty of cash stored away to weather the dark and gloomy storm when it arrives at your doorstep.
“Creating a buffer in an offset account allows clients to use their own funds to advantage themselves by reducing the interest they are charged against the loan by the amount in the offset account,” Mr Smallwood explained.
“This in turn also allows clients the access to extra funds they have banked up in the account when interest rates rise. They can use this to cover additional interest charges if any.”
Before setting up or adding to an offset account, Mr Gilfillan recommends paying off higher interest rate debts first.
“You want to optimise your accounts to pay less interest. If you have non-deductible debt, generally it is a good strategy to pay this down first. You want to prioritise higher interest rates such as credit cards and personal loans,” Mr Gilfillan said.
“You then want to make any deposits to an offset account to reduce your home loan interest.”
Data released at the beginning of 2022 from the Australian Prudential Regulation Authority (APRA) found Aussies added $50 billion into offset accounts alone since 2020. This resulted in the average household being up to 52 months ahead on mortgage repayments.
If you opt to build a buffer in your offset account, make sure to check whether your lender allows for extra repayments without incurring a penalty. Generally, fixed-rate home loans aren’t eligible for offset accounts while variable-rate loans are due to their flexibility.
5. Ensure stability in your rental properties
“Ensuring stability in a rental and investment property involves conducting research into the suburbs an investor is seeking to buy in,” Mr Smallwood said.
“This is to ensure the gearing return on investment will support the needs and repayments of the mortgage.
“Demand of tenants to rentals is something you can research online. It is a way of ensuring your investment will return the expected rental funds that are predicted.”
Essentially, you want to make sure the areas you look to invest in have a high demand for tenants wanting properties. This will provide you with the assurance that your investment property will be rented out for a long period of time during this patch of uncertainty with rising interest rates. As the saying goes, ‘the higher the demand, the better chance an investor has at renting out a property'.
The time to plan for the future is now
Ultimately, whether you choose to embrace all of these strategies or just one is totally up to you. With interest rates expected to increase again in the coming months, property investors need to be prepared.
“If you don’t follow some of these preparation tactics, you are likely leaving thousands of dollars on the table. This could be holding you back from owning your own home sooner or expanding your investment property portfolio,” Mr Gilfillan said.
While preparing for higher interest rates is a good way to go, Mr Smallwood maintains investors can cope with rising rates as the market has seen worse in previous years.
“I think currently there is a feeling of uncertainty because there has been a downward trend for a long period of time,” he said.
“This is the first interest rate rise we have seen in around 10 years and historically we are still at low rates compared to the market a few years ago. Investors should not be worried as historically rates have ebbed and flowed up and down and the property market continues to grow and remain strong.”
