What happens to your investment strategy if rates reach 1980s levels?

There’s been plenty of discussions at the moment about interest rates and what impact they are having on the property market.

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While rates are expected to keep rising, I often get the question of how people should adjust their portfolios if interest rates do keep on increasing. Now I’m not expecting to see interest rates reach the same sort of levels we saw back in the 80s but it’s important to have some plans in place.

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As always, there is really no one way to skin a cat. Your personal situation is going to be different to mine, but for investors who hold a substantial part of their portfolio in blue chip, negatively geared assets, this is important to think through.

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As rates rise, you are going to need to come up with a higher amount of cash each month to pay off your mortgage.

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The good thing is that most people would have seen a pretty big lift in the value of their properties over the past few years. Assuming you have the borrowing capacity to refinance, this can give you a lot of flexibility.

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For example, if you have a $5 million portfolio and you've been building that up over a number of years, you’re likely sitting on a good amount of equity. It is probably a smart idea to try and release some of that equity and put it in an offset account.

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You don’t need to use that equity right now and while it is still technically debt, we don’t have to access it. It can basically sit there as a sort of insurance or a backup plan in the event you are stretched and need some additional cash. For example, if you did lose your income, this might be able to prop you up.

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If you haven’t got the ability to refinance, that’s when you would look to potentially sell down a property to access the equity. While we do want to be trying to hold onto our property for the long term, we also have to be realistic about managing our money well.

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Perhaps, selling down a property to enable you to pay off some debt and reduce your other mortgage repayments is the prudent thing to do. You do need to be flexible if your situation changes or if your repayments get higher than you are comfortable with.

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Like I always say, investing in blue chip property is not for everyone. There are huge benefits to buying high-quality assets in top locations, but you have to be able to manage the repayments. That’s why this is a great strategy for those with high incomes and business owners who are able to control their income.

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While interest rates might increase in the short term, in reality, this is just another cycle. How long the RBA can continue to raise rates is yet to be seen, but you may find rates will increase for only a short period of time. But it’s best to have a plan in place to deal with higher mortgage repayments and whatever else might come along next.