Property investors have enjoyed historically low interest rates for the past two years, but that all took a turn in May of 2022 when we saw the largest one-off interest rate rises in two decades, a 25 basis point jump and the official cash rate raised to 0.35%.

Rates have continued to rise since then with a whopping 50 basis point increase to 0.85% in June. By August, it had increased a further 50 basis points and investors saw a forth consecutive rise in as many months, with the cash rate target now sitting at 1.85%  and Exchange Settlement balances at 1.75%.

We’re here to help you navigate uncharted territory by breaking down the driving factors behind these ‘sudden’ increases, how to best manage them, and what further rate hikes could be on the horizon. 

The best way to understand the rise in interest rate is to understand the factors that underlie these hikes. The biggest contributors to the recent interest increases are

• Rising inflation (5.1%)
• Declining unemployment rate (3.5%, lowest in nearly 50 years)
• High wage growth (2.4%)

While these figures aren’t the best, overall our economy has a positive outlook, with the construction pipeline in good shape and the country recovering well from COVID-related disruptions.

RBA economists suggest that increasing interest rates were a necessary measure in controlling inflation and bringing it back to target levels. In such uncertain circumstances, there are no pre-set plans in place and the future of interest rates in Australia will be “guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market.”

Mortgage repayments tend to increase as interest rates rise. The higher your interest rate, the higher your monthly repayments. 

Taking a combined interest rate increase of 75 basis points (May and June increases) will up your repayments by $200 per month for a $500,000 mortgage when compared to April.

Property investors on variable interest rate loans may already have seen a rise in their repayments as lenders pass on these increases.

Obviously, property investors already on fixed interest rate loans are protected from rising interest rates. However, they’ll likely be subjected to increased rates at the end of their fixed loan term.

Check out how interest rate rises will affect loan repayments over a 25-year loan period:

If you own an investment property or are thinking of buying one, this is the question that would be on your mind right now.  If you’re thinking of a new investment, rising rates will make properties more expensive for buyers and reduce demand. This reducing demand often forces sellers to reduce their asking prices to attract buyers (we’ll talk about this more in the next section).

If you already own a rental property, the simple answer is that more of your rental income will need to be spent on mortgage repayments. The means lower profits and less likelihood of being able to follow a positive gearing strategy. 

The short answer is yes. After years of skyrocketing housing prices, we were finally  beginning to see these values decrease in momentum before rising interest rates kicked in. With the interest rate rises leading to a reduced borrowing capacity, this trend of reducing house pricies is likely to continue for the rest of 2022 and beyond.

In a nutshell, fewer people will be able to afford to purchase property, which means reduced buyer demand or competition, which will help to stabilising price growth.

While most experts agree that the market won’t crash because of interest rate rises, it will cause a stabilisation and a potential decline in property values for the next 12 months at least. Currently, experts are tipping a 10% to 15% decline in property values. 

However, it’s important to remember that property prices have seen over 20% growth since the start of the pandemic. Even with this forecast decline on the horizon, Australia’s property prices are likely to remain higher than pre-pandemic levels despite rising

It’s possible that many property investors have not seen interest rate rises of this magnitude since first taking out their loan. 

If you’re navigating an interest rate rise for the first time, here are four practical steps you can take to navigate these uncertain conditions with more confidence.

While rates for fixed periods have also increased in line with the elevated cash rate, fixing your loan or part of your loan can offer some financial security and temporary certainty over your loan repayments. 

With the changing borrowing landscape, you may also want to consider refinancing your mortgage to see if there’s another lender or mortgage type that’s a better fit, such as a reverse mortgage. 

It’s important to check you’re charging your tenants the right price for rent. House rents are up in many states for the first time in years, with vacancy rates dropping and many landlords opting to sell their investment properties earlier in the pandemic. 

Assess whether now is the right time to increase your rental rate slightly, or plan for a rental increase in the future to combat mortgage repayment increases as interest rates continue to rise. 

If raising the rent is not an option, consider refining your budgets for repair and maintenance costs. 

By reassessing whether ccertains repairs and renovations are absolutely necessary, you can lower your expenses in these uncertain times. Plus, but making sure to proactively set a maintenance budget you can forecast your expenses ahead of time. 

The best property managers charge a flat and fair fee with no hidden costs. This can go a long way in ensuring you’re able to retain your profits even as interest rates rise, so that you’re not left with any nasty financial surprises. 

There’s no denying that as a property investor in Australia, it’s important to be across current and future interest rate rises. Knowledge is power, and with the right information at hand, you’ll be able to safeguard your rental income and navigate growing mortgage repayments with greater confidence.

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