Six ways property investors can hang on despite high rates - The Australian Financial Review

Opinion

Disciplined money decisions and savvy financial moves can be the difference between holding and folding.

Richard WakelinContributor

Jul 10, 2023 – 5.00am

While the Reserve Bank of Australia’s rate pause has provided some welcome relief, the mortgage pain is far from over. Property investors must do all they can to hold on to their properties and weather the choppy time ahead.

The much-publicised mortgage cliff sees up to 880,000 Australian households on rock bottom fixed rates switch to much higher variable rates this year, forcing many to pay hundreds or even thousands of dollars more each month.

If you have over-borrowed, it’s best to cut your losses early even if it means selling. Eddie Jim

A significant portion of those are investors. Fortunately, the strong supply-versus-demand imbalance has helped push up prices over recent months, which will help many avoid falling into negative equity. Increased rental returns are also providing helpful support.

However, there is no doubt that many investors have their backs against the wall. Investor listings have jumped sharply higher than the 10-year average in most capital cities.

The predicament is unfortunate – while interest rate pain is being felt acutely now, the suffering will eventually ease as rates are inevitably reduced.

Periods of higher interest rates and inflation are part of the passive property ownership lifecycle. Residential property investment is all about time in the market. Buy, hold, don’t sell – and repeat the process. Investors who can withstand the shorter-term financial strain stand to make lifetime gains.

That said, it’s not just a matter of gritting your teeth and holding on. Disciplined money decisions and savvy financial moves can be the difference between holding and folding.

Stuart Wemyss, an independent financial adviser and host of weekly podcast Investopoly, suggests these strategies to help you navigate this period of high interest rates.

Use your savings: Hopefully, during the lower interest rate period you have been able to accumulate cash savings in an offset account. “If you need to eat into your savings to help you through, then do so as that’s exactly what savings are for,” he says.

Cut back discretionary spending: Wemyss says the easiest way to do this is to transfer a set amount of money each week, fortnight or month into a dedicated “discretionary expense account” and pay all your discretionary expenses from there. “This will help you to be more conscious about your spending patterns without needing to track every transaction.”

Explore ways to increase your income: This can include pursuing a new role with your existing employer or a new one, increasing the amount of time you work, retraining, getting a second job and so on, says Wemyss.

Eliminate expensive repayments/financial commitments: Repaying loans with cash savings can substantially reduce your monthly expenses. “Using savings to repay HELP debt, car loans, personal loans and so forth can greatly improve your regular cash flow.”

If you can, refinance and reset loan terms: The shorter the loan term, the higher the repayments. “Resetting a loan term back to 30 years by refinancing can reduce monthly repayments.”

If you have borrowed too much, face the harsh truth: This is a tough one, but Wemyss says borrowers should prepare their numbers assuming a long-term average interest rate of about 6.5 per cent per annum. Any borrowings must be comfortably affordable at this level, he says.

“If you don’t think you can service your existing debt if interest rates were to remain at 6.5 per cent per annum for a long period of time, then it might be a sign you have over-borrowed,” says Wemyss. “If so, you must face this truth, no matter how difficult it might be. You must formulate a plan to reduce your debt levels. This might include selling property. You are better to do it now than risk hanging on too long. If you find yourself digging a hole, stop digging.”

Hopefully, these strategies can help property investors navigate higher rates without having to give up on quality properties. Those who can keep their investment portfolio together stand to reap strong rewards when interest rates ease and market conditions improve.

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