If you’re investing in the property market, it’s important that you understand the relationship between your investment and interest rates. As an investor it is sensible to factor the fluctuating nature of interest rates into your financial planning to make sure that your investment is sustainable.
In brief, when interest rates are high, the amount that borrowers can afford to pay for a property falls. The flip-side is that when interest rates are low, the amount that borrowers can afford to pay increases.
If you have a variable mortgage rate, then you are more vulnerable to the fluctuations in interest rates that happen from year to year. A fixed mortgage rate won’t be affected by fluctuations in the national interest rate, and you know that the repayments are affordable for you. This is good when interest rates increase, whereas people with variable mortgage rates will benefit more when interest rates drop.
When interest rates rise suddenly or rise so high that borrowers cannot keep up with their mortgage payments, the owner may then be forced to sell. They may also have to sell at a lower price than they’d hoped for as the high interest rates also mean that most buyers will have less money.
Rising interest rates can benefit investors in that they can lead to more renters (as few people can afford to buy) and this allows investors to recoup any increased repayments by way of rent rises whenever leases expire.
The best protection for your investment in in the planning – if you are buying when interest rates are low don’t borrow an amount that you won’t be able to manage when interest rates increase.