Everybody is aware, that property values move up and down in cycles. The strategies used varies for different stages of the property cycle.
In a growth stage it’s always best to go interest only with your loans as the repayments are less, leaving you with extra cash flow to fund another property. Two properties growing will make you more money than one property growing.
However the strategy is completely different if the property is in a decline stage. This decline stage is usually accompanied by a recession.
In a recessionary state there is pressure on interest rates to drop in order to stimulate the economy.
At this point the strategy should be to pay down your debts, with lower interest payments you will be able to pay off your principle faster.
In a recessionary state most assets are not growing so the capital gain could either be negligible or even have declined.
Hence, if you pay off your debts in this period you will save paying interest. If you are saving on paying interest then that is the equivalent of earning it.
For example if your interest rate was 6.15% then by paying off the principle and not having to pay 6.15% interest you are actually earning 6.15%.
It’s very unlikely in a down market you could earn 6.15% on your money. So the best return on your investment in this period is to pay down your principle.
Additionally in a down cycle your property values are also declining in the short term
Lower interest rates allows you to pay off more of the debt so that when the property market recovers again you will have a lower debt level or greater equity. Therefore you have manufactured some equity in a down market.
As the property market recovers so will interest rates go up but hopefully by then you would have paid off sufficient debt that it will be positively geared in addition to the equity being greater.
So the moral of the story is make sure you roll with the circumstances and adapt your property investment strategies to the market conditions and take advantage of them as they present themselves.
Ed Chan – Co founder & Chairman