The Ups and Downs: The Impact of Interest Rates on Property Investments

Interest rates have long been a huge driving force behind the Australian property market. They can often be a deciding factor in many decisions made by, investors, first-home buyers and homeowners.

Understanding the impact that the rise and fall of interest rates can help property investors make educated decisions. This means investors can maximise earning potential and understand the risks of the property market. Even if you are already an investor or just thinking about breaking into the investment market, understanding the impact of interest rates is key.

Let's start with the basics.

What are Interest Rates?

Interest rates are the cost of borrowing money, usually expressed as a percentage. In the real estate industry, it refers to the rate at which you borrow money to purchase property, known as a mortgage.
These rates tend to be influenced by economic facts, government policy, and inflation and frequently vary over time.
The relationship between rates and investments can be direct but complex, and when increasing or decreasing, they affect the property market in a variety of ways.

Borrowing Costs and Affordability

One of the first and foremost impacts of interest rate changes is borrowing costs and affordability. Increased rates mean the cost of borrowing increases, making mortgage repayments higher. This can reduce affordability for both investors and homeowners. When interest rates are lower, loans can be more affordable. This means more people may have the capacity to borrow and enter the market.

Property Prices

There is also a direct relationship between interest rates and property prices. Lower rates often stimulate demand as more buyers can afford loans which will lead to an increase in property prices.

On the other hand, high rates can have a slowing effect on the market as borrowing costs rise, potentially leading to price corrections or stagnation. It also helps to understand what is a Buyer’s market and a Seller’s market and what kind of market we are currently in.

Rental Yields

Interest rates will have an impact on rental yields. Rental yields refer to the return on investment (ROI) that is generated from rental income on a property relative to its value or purchase price. When interest rates increase or decrease, it can impact both the demand for rental properties and the costs incurred with owning them.

Higher interest rates can increase rental yield by lowering property prices and increasing the demand for rental properties. However, this can reduce cash flow for property owners due to increased borrowing costs.

Lower interest rates can reduce rental yields by driving property prices up and increasing competition in the market. However, they can improve cash flow due to cheaper financing.

How to Navigate Interest Rate Changes

There will always be some uncertainty surrounding interest rates and the property markets. However, there are steps you can take to help prepare and allow for flexibility when it comes to riding the ups and downs of interest rates.

● Fixed vs variable loans - weigh up the benefits of both Fixed and Variable loans. A fixed interest rate can provide certainty when it comes to repayment. Whilst variable rates may make for lower repayments if rates decrease.

● Portfolio diversity - opting to invest in a variety of properties and locations can help protect against market fluctuations.

● Be aware of trends - keeping an eye on Reserve Bank of Australia (RBA) decisions and economic factors that drive interest rate movements can help you be prepared for the future.

● Cash flow - make sure that your portfolio can withstand potential future rate increases by calculating different payment options.

● Speak to professionals - talk to those in the know such as mortgage brokers and bankers. They can help you design a portfolio that will help you reach your long-term goals whilst taking into account both current and future markets.

Effect on Investment Strategy

Interest rates can also greatly influence an investor's strategy. If rates are on the rise, investors may be thinking about properties with high rental yields to help lower the pressure of the increased costs of financing. Or they may wish to be more focused on paying off debt faster rather than adding to their portfolio.

When rates are low, investors may be inclined to take more risks and be keen to grow their portfolios with more affordable borrowing rates.

Riding out the rise and fall of interest rates is all part of having investments, but by having an understanding of their impact and taking steps to lessen risks, you can make educated and informed choices that will lead to a growing portfolio. Just remember that whether on the rise or fall it is important to stay flexible and well-informed.

If you think now might be the right time to start building an investment portfolio, you can contact our NXTGEN sales team who have over 35 years of experience and local property knowledge to help guide you through the process.