The power of cash savingsOne of the advantages of higher interest rates is the increased earning potential of cash savings. As a real estate investor, you likely maintain substantial cash reserves for various purposes like down payments, renovations and any unexpected expenses. When interest rates are low, the returns on cash deposits are minimal. During periods of high interest, however, you are rewarded by banks for having more cash deposited. This means you could use these savings to increase your earning potential.
Leveraging higher mortgage rates on a homeWhile higher mortgage rates may seem like a disadvantage, it actually presents an opportunity for you to maximize your returns and apply your interest income toward a real estate mortgage. Let's consider two scenarios to illustrate this point.
Scenario 1: 3% mortgage rate, 0% bank interest rateIn this scenario, you secure a mortgage at a low 3% interest rate, while banks are paying 0% on cash deposits. Although your mortgage rate is low, the opportunity cost of keeping cash in the bank is high, as your cash savings do not generate any meaningful returns. This can limit your overall earning potential.
Scenario 2: 6% mortgage rate, 5% bank interest rateIn this scenario, you secure a mortgage at a high 6% interest rate during a time when banks are paying a generous 5% on cash deposits. Despite the higher mortgage rate, you can generate a substantial return on your savings, resulting in a net positive income.To illustrate, here’s what you could earn in both scenarios with $1 million cash in the bank — and how it applies to purchasing a home.
|Scenario 1||Scenario 2|
|Bank interest rate||0%||5%|
|Annual cash interest income||$0||$50,000|
|Home purchase price||$500,000||$500,000|
|Loan amount (70% financing)||$350,000||$350,000|
|Mortgage interest rate||3%||6%|
|Annual mortgage interest expense||$10,500||$21,000|
|Net annual income||($10,500)||$29,000|