Are interest rates going up? Short answer… you bet! But when and how much are the real questions! To be truthful I have always built my portfolio with an almost total disregard for interest rates. How can I do this and still sleep at night and not fear losing my portfolio…
This one simple principle that I apply to every mortgage I have.
Hey guys, Property Search... Think Gladfish. I'm Brett Alegre-Wood, and this is Property Rant.
So today, are interest rates going up? And the answer is yes, the question really is when are interest rates going up and by how much? And the interesting thing is, and I've already done a bit of a video on this before and, in fact, I've done a number of videos on this before, but you shouldn't have to worry about what interest rates are doing, and if you are, then you're not running your portfolio the way you really should be.
So, what I use is a thing called mortgage cost averaging. Now, what do I mean by mortgage cost averaging? There's a concept called dollar cost averaging in shares, which basically means that ignore the share prices. If you have a $100 to invest every single month then buy a $100 worth of shares every single month. And the dollar cost average of those shares, so one month they might be up here to buy more shares and one month they might be up, get to buy less shares, down by more shares, but the dollar cost average of the shares will be what you have paid for all shares effectively, and that's how I kind of treat my mortgage. In other words, what I do is, I say in the UK, six percent. I say my mortgage is going to be at 6% on average over a long period of time. That means that oftentimes it will be below that. Oftentimes, it will be above that.
Now, the interesting thing, in the last 10 years has been an interesting time because interest rates have been quite low, and a lot of my interest rates are at 2.5%, 2.2% and I think even 1.9%. I've got, what is it, 3.5%? So, various interest rates. I've gotten all around that sort of thing except for the stuff that I bought a little bit later, or more recently, which is around four and a half percent. So, the dollar cost average and right now the interest rates are quite low in 2017, but they're likely to start heading up, and they will, it will come back, yeah. A low interest rate environment doesn't help anyone, certainly not savers, and if you've got money in the bank, it's going backwards. Inflation is killing it,
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So, the mortgage cost average simply means that work out whatever the interest rate is in your country, okay, on average over a long period of time, and be it a little bit on the high side because if you be a little bit on the high side, that means you're leaving a bigger margin for error, and then assume this is the key. So first of all, work out what that is, and then, number two is assume that you're paying that on your whole portfolio on all the properties. Do that calculation. Do it on a spreadsheet. You should have a spreadsheet that has all your properties, all your rents, mortgages, all your costs. Work out what that mortgage cost averaging is, and look, if you haven't got a spreadsheet, call the team, and they will give you one of our spreadsheets, all right, that we have, so that you can put all your stuff in. It has all the bits and pieces in it. Show you how much capital you've got and all this sort of stuff.
It's really simple. Just give the team a call, but if you haven't got that, get that. Work it out, and let's say it's 6%, you work it out on, or it might be 5.5 or whatever you feel is comfortable for you.
I work it at 6% even though my mortgages are quite lower than that, I assume can I afford my mortgages at that level, and if I can't, then what I want to do I want to deleverage a bit.
And what that means, selling a property or what that means, buying another property with a higher yield. So, it could be that I want to rebalance by not selling but actually buying more. That's a possibility.
So, by doing that, what you do is you become effectively immune to interest rates going up, and that's really where we want to get to in the ideal situation because yes, interest rates are going to be going up 2017, maybe not 2017, maybe 2018, we'll see. Okay.
There's lots of toing and froing right now, and really the world market is not really seeing what's going to happen with the Trump and that sort of thing. We'll see what happens. But, regardless, use mortgage cost averaging, and then you can sleep well at night. You don't have to worry about it, and you don't have to react immediately, if interest rates do start going up.
Okay Guys, have a great day. Live with passion.