It’s stating the obvious to say interest rates are very low at the moment. But what can be easily missed is how powerful low rates can be for investors. And arguably, the next few decades could provide the best opportunities in a lifetime for investors, if they are diligent and invest in high quality assets.
When will interest rates rise?
That is the million-dollar question. The short answer is that no one really knows. But we should remind ourselves that interest rate expectations can change very quickly, so we must factor that into our investment decision making. That is, make sure you can afford higher loan repayments when rates eventually rise.
The RBA has been very firm in regard to its intention.
It has said that it will not raise rates until the inflation rate rises above 2% p.a., which it does not expect will occur before 2024. Therefore, it seems variable rates are on hold for at least 2.5 more years.
We should consider the level of government indebtedness and the impact rising interest rates will have on the budget. Economies can become reliant on low interested rates – look at Japan as an example. It has been stuck on zero interest rates for more than 20 years.
For what it’s worth, my view is that variable rates probably won’t change materially over the next 3 to 5 years. Beyond 5 years, they are likely to rise but probably at a relatively slow pace. It is quite difficult to fathom rates rising above 5-6% p.a. over the next few decades. Low rates could be the “new normal”.
Simple math proves its power
Investors can lock in an interest rate for 5 years at 2.69% p.a. with interest-only repayments. I think we can all agree that is low (especially compared to early 1990’s rates, as shown in
this image doing the rounds on social media).
Assuming you have a surplus annual cash flow of $25,000 to invest, you have two obvious options:
1. Invest it incrementally each year in an investment such as a share market index fund; or
2. Borrow a lump sum, buy an investment property and use the cash flow to pay for its net holding costs.
If you chose the first option and you received a return of 10% p.a. over the next 20 years (which would be a very good outco
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