Why Homeowners Aren’t Worried About Interest Rate Increases

Experts say higher mortgage rates will hurt cash flow for real estate investors, but rising rents and larger buffers will help cushion that blow.

Pete Wargent, co-founder of buyer’s agent portal BuyersBuyers, said investors were now more likely to accept higher interest rates, as mortgage rates remained at record lows and buffers had increased over the past two years.

“Cash flow is quite comfortable for most investors right now due to record low mortgage rates and rising rents,” he said.

“Some investors will be aiming to increase rents when there is the next rental review, especially as vacancy rates were at a 16-year low in January and have fallen further in February.”

Sydney-based property investor Arthur Vekiarellis said he hoped rising mortgage rates would have minimal impact on his three rental properties.

“My cash flow situation is quite good at the moment because rents are strong and I’m not over-leveraged. I think it depends on how much the RBA will increase interest rates, but personally, I don’t find that worrying because the banks have tested our borrowing capacity at higher interest rates to ensure we can service the loan if interest rates rise by 2%.” he said.

“I also have a savings that I can use, if things get stressful. However, higher mortgage rates will affect my ability to borrow when I take out another loan because the appraisal rate will be higher, so the amount I will borrow will be lower.”

Beer – Tobacco Equation

Jack Henderson, a buyer’s representative with Henderson Advocacy who helped Mr. Vekiarellis secure two of his investment properties, said most investors will be able to absorb the expected increase in interest rates this cycle.

“If you have a million AUD in debt and mortgage interest rates go up by 0.25%, that’s AUD2500 a year, which is equivalent to a case of beer a week or a pack of cigarettes. So there’s a lot of things people can cut out of their lives to cope with rising interest rates,” he said.

“I think interest rates would have to rise at least 2% to 3% to have a significant impact on investors.”

Peter Esho, co-founder of real estate investment company Wealthi, said rising interest rates will affect renters more than landlords.

“Renters will fare worse than investors because the increase in rents offsets increased interest costs for landlords,” he said. “If you buy a good investment that can grow income faster than rising interest rates, then you will actually benefit from rising interest rates.”

Market situation

Kent Lardner, director of Suburbtrends, said the rental market situation is trending more favorably for landlords as international borders reopen.

“The arrival of international migrants will put significant pressure on the rental market, especially in the short term,” he said.

“I expect areas with higher vacancy rates to quickly disappear, especially in inner-city markets.

“I think the apartment markets in the inner city will have the most positive market shifts. I wouldn’t be surprised to see inner-city Sydney and Melbourne rents increase by 15% over the next 12 months. ”

Mr Wargent said he also expected a two-year backlog of new arrivals to Australia would cause fuel rental prices to increase by 10% to 20% nationwide this year because of tight supplies.

“I think it is difficult for rental supply to respond quickly enough, especially these days there are not many investors from mainland China to drive higher new apartment sales and construction,” he said.

“Many investors also panic sold during lockdown, causing rental supply to decrease, and many households bought second homes to gain more space, thus drying up rental supply.

“At the same time, many of these young people left home to find rental housing after the lockdown ended, increasing demand.”