In this three-part series, we'll be exploring ways Australian property investors can protect themselves against interest rate rises.
Purchasing investment real estate requires careful planning, and it's essential to have a good understanding of your cash flow now and in the future.
First things first - what's the importance of interest rises?
The official cash rate
Every month, the Reserve Bank of Australia (RBA) board releases a monetary policy statement around 2:30 pm.
This is an important moment for anyone with an interest in both positively and negatively geared property, not to mention a range of other investments.
The RBA will announce whether it is retaining the official cash rate (OCR), raising it or lowering it. The OCR can fluctuate drastically over the years: In the early 1990s it was a high at 17.5 per cent, while during the global financial crisis it hovered around the 3 to 7.25 per cent mark, with elevated levels (7.25 per cent) between March and August 2008.
In the second decade of the 21st century, the OCR has dipped as low as 2.5 per cent.
The OCR has a huge influence on lenders' interest rates. So when you're exploring investment opportunities, it's essential to closely scrutinise the financial side of things as well as the physical property you've got your eye on.
Tip 1: Be prepared
This brings us to the first tip for overcoming interest rises: You've got to be prepared.
The RBA has three statutory objectives to maintain: the stability of Australia's currency, the "economic prosperity and welfare" of the nation's people and full employment across the board. In order to achieve this it may lower, maintain or raise interest rates. It acknowledges that its monetary policy decisions can affect "savings and investment behaviour".
There are numerous factors at play that affect the RBA board's decisions. Accordingly, you've got to be prepared for possible OCR increases in the future, whether this happens next month, next year or even further in the future.
In order to be adequately prepared, it's a smart idea to have a cash buffer in place to bear the financial impact of an OCR increase, and any according lift in your lender's interest rates. We'll discuss cash buffers more in our next instalment!
