What Happens If Interest Rates Rise?

Demand for Rental Properties Can Increase

A rise in interest rates means that many potential owner occupiers will no longer be able to afford to purchase a home for themselves. These potential home buyers are then forced to rent instead.

Rents Can Increase

As the demand for rental properties increase, rent amounts can increase too.

As interest rates rise many investors will recoup their increased mortgage payments by increasing the amount of rent they charge on their Investment Property.

Property Prices Can Increase

A rise in interest rates will put more pressure on inflation. This means the higher the rate of inflation, the higher average property price.

An increase in the rental amount will increase the property amount.

An increase in rental demand will also increase the value of the property.

History Has Shown Higher Interest Rates Mean:

GOOD news for Property Investors

BAD news for Owner Occupiers

Fixed vs. Variable Interest Rate

When choosing a loan on a residential investment property, one of the major choices is whether to take a fixed interest rate or a variable interest rate.

Fixed Interest Rate

During the “fixed period” a fixed interest rate will not change. During the fixed period the borrower will always know what their repayments are, as they won’t change.

The advantage of having a fixed interest rate is that when the variable interest rates rise, the borrower with the fixed rate will not incur a change.

The disadvantage is that if the interest rates fall, the borrower with the fixed interest rate will not benefit from it.

Variable Interest Rate

The interest of a variable home loan will move up and down with the market interest rates. The amount of the variable interest rate is determined by the cash rate, which is set by the Reserve Bank of Australia. Whenever the Reserve Bank of Australia changes the cash rate, most variable interest rates will change by a similar amount.

The advantage of having a variable interest rate is that you are usually given more flexible repayment options. With a Variable interest rate the borrower is able to pay out their loan quicker, without incurring a penalty.

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