Landlord Articles

High interest rates benefit investors

Author: Mark Armstrong Date: May 24, 2009 Publication: Sydney Morning Herald

What happens if rates go up? In today's low-interest-rate environment, one of the common questions property investors ask is, "What happens if I buy now and interest rates skyrocket, like they did in the 1980s?"

It's an understandable concern. Today's historically low interest rates can't be sustained forever because at some point the economy will begin recovering, inflation will grow and rates will rise.

That's part and parcel of the economy's cyclical nature.

When rates do rise, it's doubtful they will hit the dizzying heights of the late 1980s. The major lenders certainly don't think so; they're setting their 10year fixed rates about 7per cent.

vast resources and access to the world's top economic minds, it's highly unlikely that major lenders will make the wrong call about the future direction of interest rates.

But let's say for argument's sake that they do and rates climb back to the heady levels of 20 years ago.

interest rates go up that far, it's a sign that business and consumer confidence is high. When rates go up, so does inflation. And when inflation rises, so do property values. Yes, your holding costs will be higher because of higher interest rates but as an investor you will benefit on three fronts.

High rental returns

First-home buyers won't be active because property is less affordable in a high-interest-rate environment. This will keep them in the rental market, put pressure on the available rental accommodation and drive up asking rents. The higher the interest rates, the higher the investment yield.

Negative gearing benefits

your expenditure on the property exceeds your rental income, you'll be able to soften the impact and increase your cash flow by claiming the difference as a tax deduction.

Substantial sale proceeds

you can't afford to hold the property, you can sell it. While this isn't an ideal scenario, your property will have grown substantially in value during the time of high inflation, so you'll be better off than when you purchased it and that's the aim of investing.

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