By Lee Dittmer

Ask The Experts - Question of the Month:

Subscriber Janice D asks, “should I fix my loan or do you think we are almost at the top of the interest rate rises? Also my mortgage has gone up over $600 a month with all the rises lately yet when I asked about putting the rent up in 3 of my properties the recommendation was for only a $10 increase. Why does the rental market take so long to increase when interest rates have jumped dramatically?


Hi Janice,

Great couple of questions and one’s that are being asked at the moment by a lot of people! There has been a lot of discussion in the media of late about interest rates and the associated uncertainty that has caused.

Of course, the short answer is that we need a crystal ball! Given that accurate crystal balls don’t come along too often, we just have to try and work it out for ourselves. As with all investment decisions, having a look at what has happened in the past is a great way of predicting the future.

Let’s look at your questions and see if we can answer them for you:

Should I fix my loan?

Firstly, the lenders don’t offer fixed interest rates to help people. With everything that lenders do, it is to make sure that they don’t lose money and make a profit. The risk with fixing in an interest rate as an investor is that it locks you in to a lender and if that lender is no longer assisting you with your property portfolio or your situation changes, the break costs involved with getting out of a fixed rate loan can be substantial. Cannex reports that nearly 30% of new loans taken out are being fixed, so if rates decrease during that fixed rate period, you will be locked into higher repayments or liable to pay substantial break costs to get out of that loan.

There is a very different strategy on fixed rates depending upon whether you are a home owner or investor. As a home owner, having a fixed rate can assist you with budgeting particularly when you still have school age children. As an investor, you want to maintain as much flexibility with your loans as possible, so you don’t become trapped.

The past 12 months or so have seen a strange interest rate pattern. Historically fixed rates have always been higher than the variable rate. That hasn’t been the case lately where we have seen lower fixed rates than variable. This is a strong indication that the financial markets believe that rates will decrease. A good way of trying to predict where interest rates will be in 3 – 5 years time is to have a look at the fixed rates that the lenders are offering, because that is where they believe they will be at the end of that period.

Are we at the peak of the interest rate increases?

As you may be aware, the lenders have been increasing the variable interest rates over and above the RBA Cash Rate. That’s because of the increased cost of lenders raising funds which they can in turn lend out. It depends upon who you listen to on any given day as to whether or not we are likely to see another RBA increase.

To protect yourself in uncertain times, as always, the safest thing is to make sure that you have got your safety nets in place. Locking in a rate may be one way to do that, however personally I would much rather ensure that I have got sufficient funds to carry my repayments through (based on a higher rate) so that you don’t have to stress every time there is another talk about rate rises. It also means that should rates drop, you then have the advantage of being able to reduce your repayments without being locked into a higher one that is going to be too expensive to get out of.

Rental Increases

Again, there is so much talk in the media about low vacancy rates and potential tenants having bidding wars to occupy properties, that it does make you wonder why the rental market takes a while to catch up?

The dynamics between the supply and demand can determine the amount you can expect to receive in rent. This dynamic can be managed by you as an active participant, or by your agent as a passive participant. As a property portfolio manager, it is best to monitor your rental return quarterly. In this way you can monitor the market trends. But, how often can a new rent be set? There are laws in each state to protect tenants.

A recent article in Australian Property Investor magazine addressed this very issue. I’ve taken the liberty of summarizing their data and below is a brief overview for each state:

NSW: 60 days notice must be given to a tenant of a rent increase, unless it is built into their rental agreement.
VIC: Rent cannot increase more than once every 6 months and 60 days notice must be given.
QLD: Two months notice is required if the tenant is on a periodic lease and one month’s notice if on a fixed term lease.
WA: No rental increase can take place whilst on a fixed price lease, unless the rise is built into the lease agreement at the start. The increase cannot occur within 6 months of the previous increase. On a periodic agreement, no increase can take place within the first 6 months and not within 6 months of the previous increase.
SA: Very similar to WA
TAS: 60 day notice of rental increase and not within 6 months of the previous increase.
NT: 30 days notice must be given and must not occur within 6 months of the previous increase.
ACT: Eight weeks notice must be given and an increase must not occur within the first 12 months of the tenancy with a maximum of once a year thereafter.

So in summary, you can see that the common theme is that increases can only occur every 6 months (except ACT) and cannot take place while the tenant is in a fixed rental agreement.

In all states and territories, tenants have avenues in which to complain against excessive rent increases. So I hope this helps explain why the rental market takes so long to catch up. It would be fantastic if the RBA and lenders would only put the rates up once every 6 months, but obviously that isn’t the case!

In your situation where your managing agent only recommends an increase of $10 per month, it’s possible that they were being very conservative; however it is the responsibility of the agent to manage your interests.

To this end, you could request a ‘rent list’ every quarter from your managing agent, and another agent around the corner. This will tell you 2 important things:

1. How many properties are being rented: If you only have a couple of pages on the report, there may be a scarcity of rental properties available at that time, if there are pages and pages of available rental properties you will know that there is an over supply which could be why your agent recommended a low increase.

2. Take note of the properties that are similar to yours, number of bedrooms, style of dwelling and features. If you circle 3 properties that are similar to yours, you now have a range that would be appropriate to be used for setting your new rent. Also note that yours might be either inferior or superior to the ones listed.

When you monitor this quarterly, you will be able to establish trends in each of your locations.

Lee Dittmer is an Investment Mortgage Strategist based in our Melbourne office. Lee has over 27 years of experience in the finance industry. She has worked on both sides of the finance game as a Bank Manager and as a Broker and now a Mortgage Strategist. Lee is an active investor and a passionate educator and assists all her clients to maximize their investment potential.

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