Inflation is a double-edged sword for property investors – but one that generally works in your favour if you hold debt.
When inflation is high, it tends to push up both interest rates and rents. Higher interest rates mean your mortgage costs more to service. But at the same time, your tenants are paying higher rents, which helps offset that.
And here’s the part most people miss. Inflation quietly makes your mortgage lower. Because if you owe $500,000 on your mortgage today and inflation runs at 3% a year, that debt is worth less in real terms every single year. So the real (inflation-adjusted) value of your mortgage goes down.
When inflation is low, the picture shifts. Lower inflation gives the Reserve Bank room to cut interest rates, which reduces your borrowing costs and tends to push property prices up. That can make you wealthier.
Either way, inflation tends to have a silver lining for property investors who use debt. High inflation erodes your mortgage while pushing up rents. Low inflation brings cheaper borrowing and rising asset prices.
The investors who struggle most with inflation are the ones sitting in cash – because as we showed earlier, cash tends to lose value over time.