One of the current hidden gems of owning an A-Grade asset with outstanding debt is the added bonus of real interest rates. Not only do you benefit from the compounding growth of the asset, potential income if it’s occupied, but the debt itself typically goes in the other direction. Now, I’m not talking about physically “Paying the Debt Down”, but inflation eating away at the purchasing power of the outstanding debt amount. If we use todays values, on a $1,000,000 debt. Inflation is currently at 3.5% PA. This means that what $1,000,000 could purchase in goods or services in 2022, would actually cost $1,035,000 in 2023. Since this $1,000,000 sum is the lenders money, that we have to pay back, we are technically gaining $35,000 in purchasing power here, as it still only costs $1,000,000 to pay back the outstanding debt amount. So why do lenders allow this? - Interest rates. I recently got a loan on a 2.75% interest rate. For a $1,000,000 debt, this will cost me $27,500 PA in Interest repayments. Which is where the lender makes their dough. However, even though I physically have to pay the $27,500 in “Cash”, I’ve just gained $35,000 in purchasing power. Thus, if I realised the loan, I’ve technically made $7,500 ($35,000 - $27,500) for holding the debt in this year. With some commentators expecting inflation in Aus to hit 5-10% this year alone, and the RBA still holding firm on their views of the current the cash rate, its going to be interesting to watch real interest rates fluctuate over the coming years. Will it be sustainable for interest rates to rise at a rate correlated to the rate of growth of inflation to account for real interest rates? These views and opinions are general in nature and cannot be taken as personal financial advise.

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