Interest rates are the cost of credit. There is no one interest rate. Rates vary according to the availability of funds and the risk attached to lending for a particular purpose. The home loan mortgage rate is the one that is of significance to investors and is relatively low because the asset securing the loan is a physical, ‘bricks and mortar’ asset.
Interest rates are cyclical
Interest rates go up and they go down in line with the Reserve Bank’s duty to help manage inflation and unemployment. They are ‘tightened’ (upward pressure applied) to control inflationary spending and they are eased to stimulate growth and employment.
Interest rate rises for the investor are not as bad as the media would have you believe. When rates increase less people buy their own homes and more enter the rental market, putting upward pressure on rents. Higher rates mean more tax deductions. The net effect on the bottom line for an investor of a .25% increase or even a whole 1% increase is greatly reduced by the fact that part (32.5%, 37% or 45% + 2% for Medicare) of every dollar in interest you pay is rebated back to you by the ATO.
Don’t forget too that lenders have a ‘qualifying rate’. They work out if you can afford to borrow even if rates rise by 2-3%. They don’t approve loans that are servicing on the current interest rate; they factor in the fact that rates are cyclical. If you get approval, you are truly credit worthy! So, even if rates rise you have the capacity to service debt without undue pressure.
When considering finance options the best lender is the one who will do the deal for you! Some promise low rates but bring in valuations short of the package price, forcing you to contribute more. It’s their unofficial way of securing themselves. Insisting on saving .25% on a $300,000 loan over 10 years = $7,500. But, if that lender is notorious for conservative valuations or is too slow and won’t allow the deal to ‘work’, as an investor you may potentially forgo capital gain for 10 years, traditionally 7.2%pa or in this case $300,000 profit!
A variable interest rate fluctuates in line with the Reserve Bank’s Monetary Policy and more recently, the bank’s discretion! For property investors a variable rate loan is usually the most appropriate.
A fixed rate is set for the term of the loan. If borrowers can pick the bottom of the market, this can be a beneficial strategy.