In order to thrive in spite of tightening lending conditions and rising prices, investors are looking to minimise costs by fixing their mortgage rates. How can you navigate your way through fluctuating interest rates?
At the moment, Smart Property Investment’s Phil Tarrant and his team are keen to take the higher interest rates down on their 18-property portfolio, either through direct negotiation with banks or working through a mortgage broker.
The option that they deemed most fit for their strategy is shifting from interest-only variable rate to fixed rate over a two- to three-year period.
By fixing the rates on some of his 19 loans, Mr Tarrant expects to save at least $2,100 within a month or $25,000 over a year. The savings could then be used to add value to his existing properties through simple renovations or subdivisions.
Aside from the savings, the investor is also saved from worrying about fluctuating interest rates. For the duration of the fixed period, he will be required to pay the same amount of mortgage repayments.
Mr Tarrant said: “We don't know what's going to happen with lending moving forward, so we lock into fixed rates right now. They're pretty reasonable for 4.7 per cent, better than the low fives that we're paying right now.”
In reality, according to property strategist Steve Waters, not even the smartest investor or property professional knows exactly where interest rates are going—no matter how much anyone thinks they know what they’re doing.
While market reviews indicate that no significant increases on the official cash rate are set in the year 2019, the rates from banks and lenders are subject to more fluctuations as they are independent from the Reserve Bank of Australia, which determines the cash rate.
The cost of funding have been shrinking the profit margins of banks and lenders, resulting to more difficult borrowing for investors.
However, Mr Waters believe that sooner than later, investors and owner-occupiers alike will start to see attractive ‘honeymoon rates’, particularly those that are considered ‘prime borrowers’.
After all, the bank makes money by lending money so they will always move to attract more borrowers.
At the end of the day, the only plausible way to deal with fluctuating rates is being on top of your portfolio’s administration.
Reviewing your mortgage regularly can help you lower the interest rates you’re paying for, thus letting you increase your savings and ultimately fasttrack the growth of your portfolio.
According to the property strategist: “In terms of Phil’s rates and the potential lock in, some would say $20,000 or $25,000 a year is small but that’s a lot of money, especially if you combine that with the other $10,000 that we've been saving by night by keeping our administration pretty good.”
Being involved in the management of their portfolio is one lesson that every investor must learn, Mr Waters said.
The time, money and effort you put aside to discuss the state of your portfolio and the strategies best implemented moving forward will be compensated through the money you save and the protection of your cash flow.
This is especially crucial if you are holding a portfolio with multiple properties. As big as the wealth-creation potential is with a big portfolio, the risks of a big loss are also high.
Understandably, this responsibility could be daunting, especially if you have a day job to attend to and a family to take care of. For Mr Tarrant, the secret to keeping a multi-property portfolio running is the team of professionals backing him up.
His mortgage broker, in particular, have been a huge help in navigating the lending environment in relation to lending policies from the banks and lenders and the regulations set by the Australian Prudential Regulation Authority and other governing bodies.
Mr Tarrant said: “Often, lenders do a bit of run and say, ‘We got a bit of fat here. We can pump in a whole bit of mortgage for period of time.’ What will happen is mortgage brokers will be notified by these lenders that they have preferential pricing or some sort of specific policy discounting around a particular product.”
“If you're not connected in with that story going on within the brokers’ community, you're not going to know about these things coming on. A good broker should be presenting new solutions to you for preferential pricing with the lenders that they work with,” the investor added.
Mortgage brokers also expand the opportunities for you as they provide access to good products offered outside the four major Australian banks.
“They keep your mind open products from good second-tier lenders. Essentially, it's banks that aren't the major four banks. There's some really good lenders out there so be open to that,” Mr Tarrant highlighted.
Together with the rest of his team, Mr Tarrant has established great systems and processes in place which allows the portfolio to run despite challenging circumstances, from finances to management.
Having said that, it does not give him a pass to be a ‘passive investor’. On the contrary, these systems and processes are put in place to help him manage the portfolio, whether or not he’s actively purchasing real estate assets.
“This whole premise around a passive portfolio. that's just rubbish, at the end of the day. If we could minimise the costs to hold them as much as possible, that's when we get the maximum impact in our portfolio,” Mr Tarrant concluded.
Tune in to Phil Tarrant’s latest portfolio update on The Smart Property Investment Show to know more about the importance of portfolio management and the consequences of poor administration.