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The Sun-Herald

High Interest rates benefit investors

What happens if rates go up?

In today's low interest rate environment, one of the most common questions property investors ask me 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 10 year fixed rates at around 7 per cent.

With 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.

If 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 have three weapons at your disposal.

High rental returns. First homebuyers won't be active in the market 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. If 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. If you can't afford to hold the property, you can sell it. Whilst 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.


Mark Armstrong is a director of Property Planning Australia, propertyplanning.com.au and the Property School, thepropertyschool.com.au