Don’t say I didn’t warn you.
There is increasing speculation about what action the Reserve Bank will take on rates. While most media pundits are predicting no change it looks like we have seen the last of the downwards movements. Logically then, the only other alternative is up.
Naturally, rates move up and down over time so it’s to be expected. Most people will grin and bear it, tighten their belts and soldier on. (That’s a lot of clichés in one sentence by the way.)
Increases in rates mean one thing to the majority and that is more cost. Repayments go up, spending money goes down.
However, I believe that we now have an opportunity to be ahead of the game. While everyone else is waiting for the inevitable increase in interest rates to hit them, I believe now is the time to borrow some more.
Well, when rates go up, Lenders increase their assessment rates in line with and sometimes beyond the increase. These assessment rates are part of the complex system the Banks use to determine what amount of money you can borrow. They are usually linked to the Standard variable rates for each Lender in the majority of situations. Obviously, if these rates go up then the Assessment rate will go up and it follows then that your ability to borrow is going to plummet.
Now is the time to take advantage of the lowest assessment rates we have seen for a long time. Waiting will not help. Once the Reserve bank announces any increase the Banks Assessment rates will increase and your ability to borrow today’s maximum will be gone.
Just like that.
Now I’m not saying that you won’t be able to borrow at all. Far from it. What I am saying is that your borrowing ability will decrease. How much it will cost you when it happens I can’t say. But unquestionably it will cost you in lost borrowings. You will not be able to get those dollars back.
Hesitating is not recommended. Now is the time to top up your reserves with as much as you can.
You can do this in a number of ways. You can refinance away from your current Bank or top up or increase loans with your existing Lender. Which one you choose depends on your own situation and preference. I recommend exploring the possibilities as they apply to you right now.
Importantly, even if you can’t borrow any more money, go over your portfolio and look at whether a fixed rate would suit part of your portfolio. There may be advantages in it from a cash flow position and you might be surprised at what’s available. Be aware of the downside to Fixing though as there can be substantial costs involved if you decide to get out of the fixed rate early, no matter what the reason.
As you know from previous newsletters, I believe you should borrow as much as you can, when you can, whether you need it or not and do it safely.
Your ability to create a buffer or reserve will determine how comfortable you are with changes in the economic conditions. When things are tough you need to have solid healthy buffers in place to see you through. When times are good, the buffers are in place to keep you feeling safe.
Being able to borrow as much as you can ensures you are safe. If you wait or procrastinate you will miss out. Have no doubts about that.
I’m not saying you have to refinance or even buy another property. All I’m saying is that you must look into topping up your borrowings before the ability to borrow at today’s levels is gone. Remember, any increase in the cash rate will quickly flow on to reduce your borrowing ability.
You can certainly refinance if you want to, or even consider fixing part of your portfolio, just do it now. The current climate is low with approaching highs.
The majority of people are desperately trying to reduce debt right now while the rates are low.
The serious investor understands that now is the time to increase your borrowings, not reduce it.
Finance provides the key to investing. It allows you to buy and it allows you to hold. Now is the time to make sure you have enough to be able to hold.
As we come out of this period of ultra-low interest rates your future potential will be riding on what you do today. Naturally, when you consider the options, you will be compelled to take advantage of the opportunity.
It’s these specific moments in your life that you will look back on and remember fondly as the time that set you up for the future.
Don’t say I didn’t warn you.