To Fix or Not to Fix Your Interest Rate?
Interest rates have a major impact on your property investment portfolio and are currently at 50-year lows. This creates a tremendous opportunity for investors but should also be considered a chance to prepare. What goes up must come down and what comes down, must eventually go up again.
Here's how interest rates affect your property investment:
Low interest rates stimulate the economy and encourage spending; demand for property increases which leads to growth in property prices and capital growth on your investment; there is a reduced demand for renting; pressure increases on rental escalations because more people can afford to acquire property; bond payments are lower, which usually makes up for the negative rental effects; and because of higher demand it is difficult to find bargains.
On the other hand, high interest rates curb spending and wrangles inflation; it reduces demand for property which results in poor property price growth; demand for renting is stimulated; increases rental escalations as property becomes less affordable; higher bond payments ear away at the increased rent; and it is easy to find bargains due to the lower demand and people selling their property.
It is thus critical to build up reserves in a low-interest-rate environment and not spread yourself too thin. You can even refinance your properties and keep that capital in your access bonds as reserves.
If you are prepared for high interest rates, you can acquire bargains (far below market value) if you have sufficient capital.
Many economists don't expect interest rates to rise anytime soon as the global economies are trying to revive themselves. Still, at some point, interest rates will increase again, and you need to be prepared for it.
So, then the question remains, should you fix your interest rates during this time? Remember, when you fix your interest rate, it is at a higher rate than the current variable interest rate, so if interest rates don't increase, you end up paying much more. It is also good to remember that you are competing against some clever banking analysts...
The benefits of a fixed interest rate are certainty and protection against interest rate hikes. It's like getting insured against future interest rate increases. But it comes at a price (and sometimes a hefty one). So, ask yourself if it is worth the price.
Author Jaco Grobbelaar