Michael Quinn 04 January 2017 Uncategorized

Wealth Efficiency Update — What’s the word with interest rates?

Mention the words “interest rates” to a home owners or property investors and their ears prick up as this has immediate reflection on their cash flow and lifestyle.

I do think that we often have very, very short memories – especially with interest rates.

I remember (not too long ago) with interest rates at 9.2% thinking that if interest rates get down to being in the 6’s it would be an idea to fix…

That being said, do your homework before fixing as the banks usually win…

As we all know, in recent years interest rates have kept falling and we are now enjoying the lowest interest rates on record.

I do think that it is concerning that many now see and expect our interest rates to stay low in the 3’s or 4’s – this is NOT the norm and we should note that in reality, having interest rates in the mid 7’s is the norm.

Yes, it is fact that everything cycles and interest rates will also cycle.

In the last few days we have seen two major banks lift their interest rates (the fixed rates went up 10 – 15 basis points and the variable went up 15 basis points (.15%).

Is this the end of the ride??? I think not as the “ride” is your income earning years and ability to borrow to invest as you will only have so many “bites at the cherry” / ability to invest in property throughout your working years.

In cutting the mustard on interest rates, yes, I do think that we have a period of low interest rates (for the next few years) and yes they will cycle and rise.

The truth is, if interest rates are rising, then this is a good thing as it means we have capital growth (as the reserve bank is lifting interest rates to curb or slow down capital growth).

Another key point to remember is that once interest rates rise, then so do rents (as landlords pass on this cost to their tenants), there is a six month or so lag in passing the cost of interest rates on to tenants.

So, rather than promote the true opportunity that the lowest interest rates on record represents, I choose to advise that taking advantage of these low interest rates is a gift and it needs to be calculated and expected for interest rates to return to the norm in the 7% range in the future.

Running scared of interest rates and doing nothing is not an option – if we model doing nothing going forward then that’s what you get…

Keeping your property investing safe and affordable is the key, with solid cash flow and tax deductions working to have your property running neutral or cash flow positive after tax is ideal. Understanding interest rates and finance is vital and should be done with a proven, integral finance specialist.

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