How Changes in Interest Rates Can Affect Your Cash Flow
Small changes in interest rates can have a huge impact on the cash flow of a property. In this episode we look at some examples of how cash flow is affected by rising interest rates.
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Small changes in mortgage interest rates can have a huge impact on the cashflow of your property, turning a positive or neutrally geared property into a negatively geared property really quickly. A lot of people do the sums on the property at the current interest rate, but they don’t think, okay, what if interest rates go up by half a percent? One percent, two percent, how’s that going to effect my cash flow? So in today’s episode we’re going to look at how changes in interest rates can affect your cash flow. Hey there, I’m Ryan from on-property dot com dot AU. I hope people find it and invest in property and achieve financial freedom. And one of the things that you should be looking at when you’re looking at investing in property or when you’re looking at your portfolio is what is your cashflow position. So what we’re going to do is we’re going to go through some basic examples about how rises in interest rates can affect your cash flow.
And then we’ll look specifically at some properties as well. Okay, so let’s just start here. I found this property in Brisbane with the price guide for 450,000 to $500,000 that’s renting for $765 per week. So I’m going to go over to this tool over property tools.com dot EU, which is a tool that I created myself. And if you want to get access to that, then you can go to property tools.com dot EU and sign up for it. And let’s just have a quick look at the cashflow of this property. So we got a purchase price of 500,000 and then we’ve got rental income of $765 per week, which is giving us an estimated and weekly cashflow before tax of $213 per week or about $11,000 per year. And so this is looking at a five percent interest rate. And so we changed this interest rate up to six percent.
We can see that our cash flow drops from around $11,000 per year to 7,000 per year. And if we got to seven percent, we’re still positive cashflow. Uh, even with this one, when we go to eight percent, it goes negative. So let’s have a look at this and have a look at how cash flow is affected by interest rises or by the changes in interest rates. So using property tools, again here, let’s take a loan amount of $100,000 at an interest rate of five percent, and then let’s up that interest rate and see how much extra per week it’s going to cost us. So I’ve put the deposit at zero percent, so we’ve got the full loan of $100,000 there and this actually capitalize the interest cost for us. So we can say $96, 15 per week at five percent. So let’s say we raise this up to six percent, we’re now looking at paying interest costs at $115 and thirty eight cents.
So that is about an extra $19 per week on $100,000. Let’s say we again to seven percent, then we’re looking at 134 and sixty two cents. So we’re going with a two percent increase. We’re gone from $96 up to $134, so that’s an extra $38 per week. Now $38 per week doesn’t sound like a much, it doesn’t sound like much, but we’re talking about $100,000 here in mortgage. So let’s say we were to raise that up to a million dollars and if we had a million dollars in mortgage and saw that two percent rise, then instead of it being $38 per week, extra we have to pay is now $380 extra per week that we need to pay. So as you can see, a small increase in interest rates of one or two percent can significantly affect your cash flow to the version of $380 per week on a million dollar loan.
Um, which is a lot of money to find. So you might need some buffers in there. You might need to prepare for this just in case interest rates do go up. So it’s really good that when you’re looking at property that you kind of do this analysis. So let’s go ahead and do some analysis on a couple of properties and we’ll see how much buffer is there in this property in terms of interest rate rises. So let’s start with this one here. We’ve got one in Muscle Brook in New South Wales for $218,000. That’s currently at 3:25 per week. So let’s punch that into the calculator. Turn 18,000 at 3:25 per week. And so we’ve got an interest rate of five percent, which is giving us weekly cashflow to brand 38, $39 per week. So let’s go ahead and raise that up to six percent. And we can see our cash flow has dropped to five point three, $3 per week.
So if we now go six point five percent, we’ll see we’re in the negative. So let’s go six point two, five percent and we’ll also in the negative by about $3 per week. So we can see that in this property. Given these really basic figures look, you would need to go through and adjust your property manager fees, etc. Vacancies, maintenance and repairs insurance. All this sort of stuff, adjust that to get a more accurate result, but we can see that with this property we’Ve got about a one percent interest rate. If we start at five percent, then we can go up to six percent. Now, interest rates at the moment, I think a lower than five percent, so you might have a larger than that one percent buffer, but it’s really cool to kind of play with this and see how interest rate interest rates affect the cashflow of the property.
And you guys can get access to this if you want. Just go to property tools.com dot a u. Let’s look at another one here. We’ve got this property in mildura in victoria for 225,015 to 225. And this has rented for $300 per week. So let’s put this back to five percent interest rate. Two hundred and $25,000 rented for $300 per week. Or weekly. cashflow is about $11 after. But before tAx. Sorry. So if we got to six percent, sorry, then we can see that we’re in the red already for that one. So let’s change that to five point five percent. That’s also putting us in the rate of five point two, five percent were still in the green. So we can see that we’ve got about up to a five point five percent interest rate before we go negative cashflow. So it might be, what is it, five point three, about five point three percent and our cashflow becomes basically neutral.
And so we can see that property has less of a buffer than the other one. Now let’s have a look at this one here in brisbane for 450 to $500,000. That’s rented for seven 65 per week. So let’s put in $500,000 asking price rented for seven slash 65 per week. So starting with a five percent interest rate, we’re looking at about $213 per week in positive cashflow. And we got to six percent. That goes down to $136. We got to seven percent. That goes down to $59, but still positive eight percent. We’re now in the negative. So what about seven point seven? Five, okay, seven point seven, five percent. Then we are still just positive cashflow so you can see that that one has a much larger buffer and so when you’re looking at properties and if you’re looking to invest for positive cashflow, interest rate rises and interest rate changes can massively affects your cash flow.
And so it’s important to look at the buffet here. How much buffer do you have? And then go ahead, if you purchase a property already own a property, what can you do to increase this by far? So how can you increase the rental yield on your property to renovations or through granny flats so that you can create more security for yourself by having a larger python so they have it. There’s a bit of insight into how changes in interest rates can affect the cash flow of a property. So when you’re doing your analysis, don’t just look at current interest rates. What our current home loan interest rates. Let’s let’s just google it. So as I’m recording this, um, compare homeland rates from three point three, nine percent. Okay, that is pretty crazy. Three point six, seven, three point seven, four. Okay, so we’ve got really low interest rates at the moment.
So I started at five percent. You’re looking at a bunch of these interest rates under four percent, so you might have even more buffer there because your starting lower, but you’re really good to assess that buffet and see, okay, where can interest rates go up to before you can no longer afford this property. So you kind of future proofing yourself there. and if you want to get access to this tool, if you’re currently looking at investing in property and want a quick and easy way to analyze the cashflow, and this tool is great for that. You can do what I did today, just play around purchase price, rental income and interest rate, and you can see the estimated cashflow or you can go into way more detail, adjust your deposit, look at some other extra costs, other costs you want to add to the loan. You can also go through and adjust all your weekly or monthly the ongoing expenses, so property manager fees, expected vacancy, repairs and maintenance.
You can go through all of this and let’s say that your repairs and maintenance are expected to be more than you can adjust that and that’s going to change your cashflow estimates so you can go through as granular as you want, or we can do what we did today and just use it as a quick way to look at properties and a quick way to assess what the cashflow of properties don’t be. So again, go to property tools.com.eu to check that out. There’s a small monthly charge to get access to this, but it’s extremely affordable. I really hope that you liked this episode and found it helpful today. Just looking at this one thing that you know, it’s just an extra skill to add it to your arsenal as a property investor when you’re assessing property. So I want to build up those skills for you and if you haven’t checked it out already, check out this video that I did with ben everingham onto properties to financial freedom. So how you can invest into properties and actually achieve a baseline level of financial freedom through just to property. So go ahead, check out that video. I’ll leave the links in the description down below and until next time, stay positive.