Private property issue #34 - "I was wrong”

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I was wrong … everyone was.

Interest rates are about to rise. Here’s how to handle it.

Why are interest rates rising?

Last week’s Private Property talked about how every major bank, the Treasury and the Reserve Bank expected inflation to come down by about 0.8% at the next announcement.

On Tuesday, the latest inflation result came out – 7.2%. Only 0.1% down.

So we still have more inflation than anyone expected.

This increased the interest rate the banks pay. So they’re passing on that cost to you in higher mortgage rates.

What’s the impact on property investors?

Today, ANZ announced its 1-year fixed interest rate will rise to 6%. Other banks will likely follow.

That 0.5% increase in interest rates means an extra $500 of interest per $100,000 of mortgage (compared to the rates offered yesterday).

So if you have an $800,000 mortgage, that’s an extra $4,000 of interest costs ($77 a week).

So more property investors will need to top-up their properties to cover the extra interest. This is because the rent doesn’t always cover all of the costs.

What can you do? Here are 4 strategies to help manage your cashflow as interest rates rise.

#1 – Set up a revolving credit

The first option is to use a revolving credit. This means using the bank’s money to pay the extra top-up.

Yesterday I crunched the numbers for one investor.

They have an $800k mortgage and want to know how long a $20k revolving credit would last if they take out that extra $77 a week.

They were surprised to hear the answer – 4 years and 3 months.

They’re going to go with the revolving credit, knowing that interest rates will likely decrease within 2 years.

Sure, they’ll use debt to finance debt. But, they’ll pay off your revolving credit as the property's cashflow improves.

#2 – Reduce your mortgage repayments

According to Westpac, many borrowers (68% of them) are ahead of their mortgage repayments.

If you need to, you can reduce the amount you pay on your home mortgage to free up cashflow while interest rates are high.

For example, I’ve been working with an investor with a $500k personal mortgage on a 15-year term.

She wanted to free up an extra $120 a week to go towards her investment properties.

She’ll do this by extending her term to 18.8 years (an extra 3 years and 10 months).

While interest rates are high, she’ll direct money she’s already spending away from her home towards her investment portfolio.

This does mean she’ll pay her mortgage off more slowly. But, once rates eventually come down, she’ll change back.

#3 – Reduce your kiwisaver contributions

Similarly, you can consider reducing these payments if you are paying above 3% for your Kiwisaver.

Yesterday I was on the phone with an investor. Between her and her partner, they earn $180,000 and are both putting 8% into their KiwiSaver.

If they reduce this to 3% (the minimum to get the full employer and government benefits), they’ll free up $173 a week in cashflow.

There are downsides to consider. If you pay less into KiwiSaver, you’ll be investing less.

But, if it’s a choice between putting money into KiwiSaver and holding on to your rental, this could be a worthwhile trade-off.

#4 – Increase your income

The next strategy is the Earn, Baby, Earn.

This is where you explore ways to increase your income. Here are three ways to do this:

– Review your rent

Last week, another investor I work with (Ed) increased the rent on one of his rentals by $55 a week. His property has a relatively small $300k mortgage.

So that rent increase would pay for a 1% rise in interest rates.

– Negotiate a pay rise

There is an acute labour shortage in New Zealand. A net 58% of employers say it is hard to find skilled workers. Now is the time to ask for a pay rise.

If you’re on $100k and negotiate a $10k salary increase, that’s $120 per week more in your bank account – after tax.

– Charge board

If you have older children living with you, it could be time to start charging them board or get a flatmate into your spare room.

If you want to apply these tactics to your portfolio, now is the time to talk to your financial adviser or mortgage broker.

If you’re working with us here at Opes, reach out to your property partner to review your property investment cashflow.

Or speak to your mortgage adviser to see which of these will work for you.

There are 3 other strategies you can also try. Learn what they are in this podcast episode and our article.

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