How Can You Protect Your Investment Properties Against Higher Interest Rates ?
Purchasing when interest rates are low can be great. If interest rates rise again, however, will you be able to make higher mortgage repayments each month? This is a common question for investors, they want to invest but are not sure if they can handle the risk of interest rates rising.
Webinar participant, Shane, recently asked, “How do you manage the risk that interest rates could rise above your ability to service mortgage repayments – particularly if you have multiple properties?” Nathan says, managing this risk is an important part of assessing your cash flow before deciding to purchase each property. He recommends the following practices.
FACTOR IN A RATES BUFFER
Nathan says, when he calculates cash-flow analysis on each property he purchases, he factors in a rates buffer of around two rate increases. For example, if rates are set at 4.5 per cent, he will assess his cash flow position based on higher mortgage repayments with an interest rate of 5.5 per cent. This will allow him to see how higher rates will affect his cash flow position.
TAKE CUES FROM ECONOMIC TRENDS
During his time as an investor, Nathan has developed enough experience and know-how to forecast rates movements each month. He says he is generally correct. It helps to follow economic trends each month and research the different play of factors that influence the Reserve Bank’s decision to increase or decrease interest rates. This will help you stay informed and better able to prepare yourself for higher mortgage repayments before they hit home.
REGULARLY ASSESS YOUR NUMBERS
Treat your investing like a business, says Nathan, and regularly review your numbers. Know what the best and worst case scenarios would be in terms of interest rates, and have some contingencies in place to protect you from losing your shirt. If you have 20 or 30 properties and rates steadily climbed by four per cent, then “no second job is going to help” you cover the extra expense, says Nathan.
HAVE BACK-UP PLANS
Make sure you have a well-thought-out strategy that includes a plan and exit strategy to cover to worst case scenario in case of sharp interest rate hikes. Remember that while rates can increase, so can rents too. If you know you can’t service too high an increase, and you are already charging optimum rent for your properties, you may want to consider fixing your loans at a low rate for a while. This may restrict you from accessing equity, so it is important to have a detailed discussion with your broker or lender about the consequences of doing so. If a rate rise is hurting your cash flow too much, there is also the opportunity of deleveraging yourself by selling some properties in order to pay down some debt.
The most important thing to remember about managing risk, is to face up to it. Don’t shrug it off and assume that you will be able to manage. Don’t decide to deal with it when it happens. Look it square in the eyes and come up with a solution now. It may not happen in the next couple of years, but at least you know you will be able to manage if it does.
Have you been hit by rising rates in the past? How did you manage the higher mortgage repayments?