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INCREASED INTEREST RATES ... WHEN, HOW AND WHAT IT MEANS FOR INVESTORS



The Reserve Bank of Australia has kept the cash rate unchanged at a record low of 0.1% again for October.


They have reaffirmed their commitment to maintaining supportive monetary conditions and are unlikely to increase the cash rate until inflation is back within the 2%-3% target range, a condition that is unlikely to be met before 2024.


The Australian Prudential Regulation Authority (APRA) has announced changes to lending rules for lenders. They have introduced a new buffer of 3% (up from 2.5%) above the loan rate when assessing a borrower’s ability to make their loan repayments.


"The buffer provides an important contingency for rises in interest rates over the life of the loan, as well as for any unforeseen changes in a borrower's income or expenses.” [1]

Taking both factors into account when assessing market conditions, it is unlikely that interest rates will be significantly increased in the short term.


In an article in the Financial Review, Deloitte economist Chris Richardson noted that the inflation rate would need to jump to more than 3% for the RBA to consider lifting the interest rate.


“So, wake us up when wage growth has doubled. We’ll happily have the discussion then. But until that point, if you’re worried that inflation will drive interest rates up any time soon, then you’re wasting your time.” [2]

What Does An Increase In Interest Rates Mean For Investors?

If interest rates do rise in the future it will be important to understand the effect this can have on the cash flow of your investment property. Selecting a property with strong rental yields will be important to managing any fluctuations in interest rates.


“A high cash flow where all the income takes care of all the expenditure gives you serviceability, which gives you time in the market because you’re not at the mercy of high-interest rate and market fluctuations.” [3]

3 Tips to Minimise Risk.


Negotiate a better interest rate with your bank.

Now more than ever banks and lending institutions are competing to entice new customers to switch by offering low-interest rates. Check current interest rates via a comparison website such as www.finder.com.au. If your interest rate is higher than what is available, speak to your bank or broker to negotiate a lower interest rate. You will be surprised by what some lenders will offer.


Consider a fixed rate.

Fixed rates can offer you peace of mind that your repayments will remain unchanged for the duration of the fixed period, this can help you budget into the future.


Select the right property in the right market.

It is important to understand the underlying factors that will affect capital growth and rental yields, not only today but into the future. Our panel of some of the strongest economic minds in Australia provide us with an unbiased forecast of future market trends.


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Next Steps


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Tim Davis – Property Investment Consultant


P: (02) 9939 3249

E: tim@meridianaustralia.com.au

W: www.meridianaustralia.com.au



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Disclaimer: When considering purchasing a property, it's always prudent to seek the advice of an appropriately qualified professional to determine which strategy is most appropriate for your circumstance.



References:

[1] ABC News

[2] Financial Review

[3] Smart Property Investment