With interest rates having remained suppressed for as long as they have, chances are many investors are not entirely prepared for the coming rate rises.
And rise they will.
There is nothing sinister or extraordinary happening. The same economic entropy that has been pushing the rates down for so long is also responsible
for nudging them upwards in recent months. And it is happening right now.
The effects interest rate has on your portfolio
It only takes an increase of a few basis points to topple a badly-strategised portfolio.
Let’s take a look at a rough example. The Auckland median house price is currently $799,000*. Say for example you
buy a property at that price financed entirely by a loan at 5.34%** (many assumptions made including using the
equity of your own home to secure the loan). Your annual interest expense is $42,667. Every basis point increase will cost you an additional $80 a
year. What would a whole percentage increase look like? If by this time next year interest rate is at 6.34% (which is still on the low end of the spectrum),
you will have to find another $8,000 (or $154 more in rent per week) to afford the loan. So while rates are still relatively low and your buy-and-hold
strategy is enjoying a great cash on cash return, it is time to start thinking about what to do when rates go up.
What happens when rates go up?
Here at APIA, we encourage investors to develop a range of skills and crystal ball gazing is not one of them. So, for the time being, we will leave
any discussion about...
