The official RBA cash interest rate has remained at 0.75% since 2 October 2019. There is some talk of another 0.25% rate cut at some point in 2020 but that remains to be seen. With CPI inflation expected to be 2% and economic growth creeping up towards 3%, Australia’s home loan interest rates are expected to remain low for a long time – perhaps years.
expected to remain low for a long time – perhaps years.
RBA Cash Rate for the last 20 years
Home loan rates normally sit almost 3% above the cash rate so expect to pay around mid 3% range for a variable, interest only investment loan. If this remains low for some years, it makes paying your investment loan interest pretty comfortable. As a rough example, interest on a $400,000 loan at 3.5% is $269 p.w. You would expect a $500,000 house to have rental income of $400 p.w. depending on the suburb. Even after paying expenses like management, rates and insurance, you might expect to break even on cashflow. So then it’s down to the capital gain. Try to sell during a low income year (maybe in retirement) to minimise the Capital Gains Tax and you might pick up as much as 30,000 p.a. (based on 6% growth). Each year the rent might go up a little too!
When interest rates do begin to rise, many investors will struggle to meet the repayments. Be sure you’re not one of them. Leave room for interest rate rises which are sure to come. Banks often factor in a 2% rate rise into your loan calculations. 2% on a $400,000 loan is an extra $154 p.w. You would need to put this in out of your own pocket every week but at least it’s a tax deduction for you. If it interferes with your lifestyle you will soon tire of it and be inclined to sell at exactly the wrong time.
Better to plan for it and hold your property through these periods. At Investment Property HQ we include interest rate increases into your calculations so its all taken care of. Its much nicer to be in control than to be critically influenced by things that are out of your control. Its all part of the planning we help you put in place, so your investment property delivers the results you want it to. Its always worth talking to us. We love property investors so feel free to contact us and have a chat any time.