I’m sure it will come as no surprise to learn that the Banks control how much you can borrow. Did you also realise that they control the cash flow of your investment portfolio as well? After all, if you have a mortgage on your investment property the Bank has direct control over the costs such as the interest rate and the fees they charge you which has an impact on the cash flow.
The higher your borrowing amounts the more influence they have on your ability to make a profit and lets not forget that investing is about making money.
Thankfully, for the majority of us, the Banks play an important part in allowing investors the ability to purchase property in the first place. Let’s face it, without the Banks how many investors would be able to fund their purchases?
So, given the reliance on the Bank funding, what impact will Brexit have on funding costs?
At the moment approximately 30% of Bank funding is derived from Europe and EU Banks were crunched in the immediate aftermath of the Brexit announcement. Clearly any change in sentiment there will create a situation for our Banks.
I think we may well see more increases from the Banks, independent of the RBA decisions as a result of increased funding costs. We have seen in the past how the Banks are happy to pass on less than any reduction from the RBA so it could be a double whammy.
Look how Investors are penalised with higher interest rates now and how even Owner Occupiers are penalised for Interest Only repayments. We are already seeing a tightening of credit conditions with Banks signalling changes to policies.
These issues are not going to go away soon.
On the plus side, we are in a low interest rate environment right now, possibly for another decade.
The long term average variable interest rate is around 7% with current rates sitting around 5% BEFORE any Bank discounting. There are even Lenders advertising rates below 4%. It’s easy to be seduced by low rates tied to low repayments but given the potential for change and the speed at which change can take place perhaps it’s time to review the situation.
What will your cash flow be like if the low rates of today increase to 7%? It’s not unusual for the Banks to increase rates for their own bottom line. Would your budget survive such an increase?
Do you even have a Budget?
The number one rule when you take on debt is to have reserve funds available for emergencies. Right now, you should make sure you are in a position to manage debt if conditions change. Having adequate reserves should be a priority for every property investors in this current climate.
The review shouldn’t be limited to Mortgages either. Given the uncertainty and change in the market, a review of your properties would also be wise. Perhaps the composition of the portfolio could be tweaked for long term benefits?
Either way, it’s time to review your position and get back some of the control.
Find out more about how interest rates and how they can effect your property roadmap in our exclusive whitepaper The Interest Rate Illusion: Why Smart Investors and Interest Rates don’t mix.