How to Protect your Property Investment Portfolio from the Dreaded Fixed Rate Cliff

Investors coming off fixed rate loans could see significant repayment increases

According to the ABS, the number of people taking out fixed rates loans reached a high point in July 2021, with around 46% of all new loans secured at a fixed rate. This means that if a property investor took out a $600,000 fixed-rate loan in July 2021 with one of the Big Four for 2 years at a rate of 1.9%, they would now be paying around $2,500 per month.

However, when the loan comes up for renewal in July 2023 (assuming no other changes have been made to the loan) and if rates have risen back to pre-pandemic levels of around 3.3%, their repayments would increase to more than $3,100 per month, amounting to an additional $600 per month in repayments.

This is a very real scenario for the more than 800,000 households with an owner-occupied or investment property loan and affects billions of dollars in loan value. According to RateCity analysis of data coming from the CBA, Westpac, and NAB, more than $130 billion of their loans are due to expire in the coming year, so it’s critical that property investors take action now.

Australia's current interest rate environment

The RBA has made clear its intentions to bring down inflation. Accordingly, over the past few years, it has increased the cash rate nine times which, in turn, has been passed on by lenders. With the current interest rate sitting at 3.35%, many experts are predicting it could rise to as much as 4-4.5% by the middle of this year.

Given this environment, and the fact that there is still some time before fixed-rate loans expire, it is important that property investors take proactive steps to protect their investments. Here are some tips for doing just that.

How to protect your property portfolio from the fixed rate cliff

How taking a portfolio approach can help

Savvy property investors know how important it is to take a portfolio approach to protect their property investments against rate hikes. A portfolio of properties, across different locations and product types, helps spread the risk and gives investors more options when it comes to managing their investments. This approach necessitates monitoring property market trends and factors affecting your investments, as well as taking a long-term view so you can plan for any future rate increases.

It also means considering all the factors that affect property investments, such as property values, rental income, and capital growth when making refinancing decisions. Property investment is a long-term game, so it’s important to consider how changes in the market could affect your portfolio over the coming years. To get ahead of any potential rate increases, it is essential to have a strategy in place for each of your investments.

Keeping your LVR in check

A loan-to-value ratio (LVR) is the total amount of your loans divided by the value of your property and is used by lenders to determine whether you are eligible for a loan. Generally speaking, the lower your LVR, the better, as this can help you qualify for more competitive rates and terms.

To help protect your investments, make sure that you’re meeting LVR thresholds (set by the Australian Prudential Regulation Authority at 60, 80, 90, and 100% of the property’s value). The higher the LVR on a property, the higher the risk to the bank. So, whenever a bank is about to hit each loan-to-value (LVR) threshold, it must set aside additional capital – which means that, at some point, the borrower might be asked to add more money of their own or to sell the property.

A need for savings

It’s standard practice for property investors to have enough cash saved in reserve to cover any unforeseen circumstances, including any potential shortfall caused by rate hikes. This could be used to pay for any rate increases or to cover the full loan amount if you are unable to refinance. Consider setting up a savings account dedicated to your property portfolio, so that you can quickly access funds when you need them.

If you’re looking at increasing your portfolio in the future, you’ll need cash too. Having a buffer in place or being able to access the equity pool in your current investment properties will allow you to take advantage of any investment-grade opportunities that may arise.

Final thoughts

Ultimately, it pays to be prepared when it comes to managing your property investments and protecting yourself against a potential interest rate cliff. Keeping a close eye on your loan terms, refinancing options, and other strategies will help you safeguard your investments for the long term. Regularly monitor changes in interest rates and keep a close eye on the property market so that you can make informed decisions about your investments. And, of course, having enough cash flow to cover any rate hikes or full loan amounts is essential. Take control of your portfolio now, and you can enjoy a secure financial future tomorrow.

Ironfish is committed to helping you get ahead of the game in today’s highly competitive market. With Ironfish, you won’t have to carry the hassle and stress that often comes with investing in property alone. Our experienced team is here to help you create a successful property portfolio that works toward achieving your long-term goals. We provide world-class investment strategy, training and development, and personal mentorship for our investors throughout every stage of their journey. With Ironfish by your side, you can achieve your property dreams with confidence.