How does the cash rate impact your investment loan?
Posted on: 31 Jul 2023

How does the cash rate impact your investment loan?

"There is all this talk about the increasing interest rates over the last year, but how does it affect your investment loan? The article below highlights some ways." - Alex Kenward, Finance Manager

Investment home loans are a popular way for people to invest in property, providing an opportunity to earn income through rental yields and capital growth. However, like all financial products, investment home loans are influenced by various factors, including the cash rate set by the Reserve Bank of Australia (RBA). In this article, we will explore how cash rate increases can impact your investment home loan.

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The cash rate is the interest rate that banks use to borrow or lend money from the Reserve Bank of Australia. When the RBA increases the cash rate, banks and other lenders will generally increase their interest rates on loans, including investment home loans. This means that if you have an investment home loan, your repayments will increase, reducing your cash flow and potentially impacting your ability to maintain your investment property.

A cash rate increase can also impact the value of your investment property. When interest rates increase, the cost of borrowing money becomes more expensive, which can lead to a decrease in demand for property. This can result in lower property prices and potentially impact your rental income, as fewer people may be willing to pay high rental rates for a property.

Investors with variable interest rate loans will be the most impacted by cash rate increases. As the name suggests, the interest rate on these loans can change depending on market conditions, including the cash rate set by the RBA. If the cash rate increases, the interest rate on your variable interest rate loan is likely to also increase, which can have a significant impact on your repayments.

If you have a fixed-rate investment home loan, you will generally be shielded from immediate interest rate increases. Fixed-rate loans have a set interest rate for a period, typically ranging from one to five years, providing certainty and stability in repayments during that period. However, once the fixed-rate period ends, the interest rate on your loan will switch to a variable rate, which can be influenced by the cash rate.

There are a few strategies you can use to mitigate the impact of cash rate increases on your investment home loan. One option is to negotiate a lower interest rate with your lender. By doing so, you may be able to reduce your monthly repayments and make your investment property more affordable.

Another option is to consider refinancing your investment home loan. Refinancing involves replacing your current loan with a new one from a different lender, potentially with a lower interest rate or better loan features. This can help you reduce your repayments and make your investment property more affordable.

The importance of loan calculators when the RBA increases rates
When the RBA increases the cash rate, it can be helpful to use a loan calculator to determine how the increase will impact your mortgage repayments. A loan calculator can help you estimate the impact of different interest rates on your mortgage and allow you to plan for potential changes in your repayments.

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Source: Your Investment Property

Mortimer, M. (2023, July 25). How do cash rate increases affect your investment loan | YIP.