Are you enjoying the low-interest rates at the moment?
They’re likely to get lower over the next year or so, and remain lower for a decade or longer.
But what does this mean for property investors?
What are the implications for property and other asset classes?
What does it mean for your returns?
How should you invest differently over the coming years?
These are all important questions for people who want to become successful property investors.
I’ll be discussing these questions with Pete Wargent in this episode.
I’ll also share a mindset moment about where you’re going to be in ten year’s time.
I learned this lesson from one of my mentors, and I hope it helps you in the process of planning your future and getting the most out of your life.
How does a low-interest-rate environment affect your investment strategy?
The Reserve Bank has cut interest rates in 2 consecutive months – June and July to historic low rates and the money markets are factoring in two more interest rate cuts one later this year and another in the first half of 2020.
And it’s likely we’re in for a long period of low-interest rates moving forward.
So, what does this mean for property investors?
It’s not just Australia that has low-interest rates – why is this happening?
- In fact, we’re catching up to the rest of the world – wherein general rates have been low since the GFC
- Long term fixed mortgage rates in the United States are less than 3% p.a. In the UK, rates are under 2% and even lower in Europe (circa 0.50% p.a. in France for example).
- In Australian this week, a 5-year fixed home loan rate fell below 3% p.a.
- And in Demark the other week, one announced it would pay borrowers 0.50% p.a. to take out a mortgage!
What’s going to happen to interest rates?
- The market is predicting that the RBA will cut rates by 0.50% by mid-2020. If this turns out to be correct, Australian mortgage rates could fall even further.
- Many commentators have suggested that interest rates may not increase materially for a decade or longer.
Will low interest rates have the desired effect?
- Eventually, yes. The Reserve Bank has more tools they can use such as QE, or the government can spend more money.
- Interest rates may need to fall pretty close to zero before inflation returns to that target 2%-3% rate.
Now we’re talking about the official cash rate - - home mortgage interest rates are higher – what will happen to those?
- The banks need to charge a margin to cover their overheads and deliver a profit to their shareholders – this margin needs to be at least 2%
What does this mean for investors, especially those that borrow to invest in property?
- Lower holding costs for property investors – for many this will make property more affordable
- The negative cash flow – drain on your personal finances will be considerably lower.
- Less negative gearing - ow interest rates significantly reduce the negative gearing tax benefits for property investors – but negative gearing was never really a reason to invest
- However, some investors were investing in property with the hope of it reducing their tax liabilities.
A low interest rate environment makes borrowing/leverage a sensible investment strategy
- Don’t use your own money if you can achieve a better investment return greater than the mortgage rate
- Well located capital cities properties have grown on average by 7% per annum over the last 40 years – then add the rental returns and you easily get 10% total return on your property – it makes sense to borrow at these low rates to get those sort of returns, which you can improve through correct asset selection.
- It also makes sense to borrow to leverage into a dividend producing share portfolio - the dividends should well cover the interest cost and give you positive cash flow
What will low interest costs do for property values and for rentals?
- Theoretically, low interest rates should push up property values. The problem will be obtaining finance
- In the past, cheap money has led to more speculation and asset bubbles – property and shares
- If interest rates are low and more people can afford properties and it becomes cheaper to own than rent, this may lead to a smaller pool of tenants and lower rents.
The bottom line
Correct asset selection will be critical – only own “investment grade” properties that will remain in continual strong demand by a wide range of owner-occupiers
Links and Resources:
Metropole’s Strategic Property Plan – to help both beginning and experienced investors
If you’re interested in taking your property investing to the next level, join us at my annual Property Renovations and Development workshop in October.
Some of our favourite quotes from the show:
“The key is to look and say where am I? What could I do to make the changes to ensure that I could take more certain daily steps towards the treasure that I want?” – Michael Yardney
“It doesn’t make sense to use your own money, not to borrow, if you can achieve a better investment return with a mortgage.” – Michael Yardney
“The rich don’t like to commute.” –Michael Yardney
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