Investing in a low interest rate environment
For just over a year, there has been a lot of talk about the historically low cash rate in Australia. In August last year, the Reserve Bank of Australia dropped the cash rate to 2.5 per cent and it has since stayed put. As a result, many Australian households and the wider economy have been affected.
In fact, the official cash rate can impact households in different ways. As many interest rates provided by lenders are based upon the economy and the official cash rate, these figures can change at a moment's notice. For example, variable home loan interest rates are very much tied to the official cash rate. If it goes down, it's likely your variable rate loan payments will too.
The same goes for other types of finance, including credit cards and personal loans, which may make current financial conditions a lot easier for people to reduce their debt.
However, another effect has been seen in this low interest rate environment. Many Australians have turned to the steadily growing Queensland rental property market in order to grow their wealth.
But before you jump on the bandwagon and dive right into the real estate market head-first, make sure you're in the right financial place to do so.
Investing in property
Chris Childs, founder of Think Money, pointed out that many people are choosing to invest in a rental property at the moment due to low rates. However, she noted that people need to be wary before making any financial commitments.
"[Rate reductions] make it affordable to get into the market, as interest rates are low. However when you work on affordability, remember that interest rates are uncontrollable," she explained.
"People can get into difficulty by buying when they can afford to, but can't afford it when interest rates go up."
Many first-time investors might leap at the chance to buy a property under low interest rates, but they need to keep in mind how future rises might affect their financial circumstances. What you'll be paying on a loan with an interest rate of 5.88 per cent will be very different if rates increased to over 7 per cent in the future.
Looking to the future
While the cash rate is at an historic low, it won't stay this way forever. Some industry experts predict that interest rates could rise in early 2015, while others don't expect any change for almost a year.
However, a rise in interest rates isn't all bad for property investors. In fact, Chris notes that many property investors actually look forward to a hike in interest rates.
The reason behind this is why interest rates are rising in the first place.
"Higher interest rates are exceptionally good for investing. The reason that rates go up means the economy is doing well. As interest rates get higher, the property market is also going up too," she explained.
"Most educated investors look forward to rates going up, because the value of property goes up as well."
Coming up with a solid plan
Although a rise in interest rates will mean your Queensland rental property portfolio is growing in value, your finances may still be affected by higher interest.
Before making any financial decisions, you'll need to meet with a wealth coaching expert to ensure you've got the right plan that suits you.
When you speak to a Think Money wealth coach, you can have your property portfolio set up to handle changes in the market. You'll also get detailed advice on how to protect yourself, should interest rates rise in the future.
Remember, every investor is different. Each person has their own goals, timeline, strengths and weaknesses, so coming up with a tailored plan is crucial to success.