How You Can Prepare For Interest Rate Rises
This is the first time in 11 years there has been a hike in the official cash rate. The decision comes after last week’s surprise inflation result. According to the Australian Bureau of Statistics (ABS), the Consumer Price Index (CPI) rose 2.1% in the March 2022 quarter and 5.1% on an annual basis.
RBA governor Dr Philip Lowe says, “The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level than was expected. There is also evidence that wage growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.”
He confirmed there will be more interest rate rises ahead, and some economists are predicting the cash rate could reach 1.75% in 2024.
While it may seem counterintuitive that the RBA has increased rates at a time when the cost of living is already rising, they have done so in a bid to slow demand in the economy and counter rising inflation.
Rising interest rates mean borrowers will have higher repayments and less money to spend, which the RBA hopes will reduce demand and ease pressure on the prices of goods and services. This also works to discourage new and existing homeowners from borrowing beyond their means.
So what does this mean for home buyers and homeowners with mortgages?
Buyers looking to enter the property market could see a reduction in their borrowing power as a result of the cash rate increase.
When banks approve home loan applications, they assess borrowers’ ability to repay their home loans at an interest rate several percentage points higher than the mortgage rate, known as the assessment rate.
There are different levels of reduction to buyers borrowing power depending on their circumstances and the lender. Although rates are predicted to continue rising incrementally, the impact on buyers’ borrowing power may only be marginal to begin with, says Diaswati Mardiasmo, PRD Real Estate’s chief economist.
On the plus side for buyers, it’s expected that rising interest rates will slow house price growth, potentially making it easier for first-home buyers to get into the market.
The RBA has already researched this in its most recent Financial Stability Report. In that report, it noted that a 2 percentage point rise in interest rates could see property values drop by 15 per cent.
Putting this into context though – property prices across Australia have increased by more than 25 per cent since the beginning of the pandemic, and in some regional areas, the increases have been more than double that.
Ray White chief economist Nerida Consibee said that high inflation rates – and the rise in interest rates that follow – meant slower growth rates were a sure thing for the rest of 2022 for the Australian market as a whole.
For homeowners – they may be unaffected in the short term if they are on a fixed rate, depending on the term of their fixed loan, but it’s important to check when the term expires to plan ahead.
At least four to six weeks before the fixed term expires is the recommended time frame in which to review your mortgage and speak to your broker or lender about your upcoming options.
However, homeowners with variable rate mortgages could see their repayments increase within the next week, if banks move swiftly to pass on the rate rise.
So how can you start preparing to manage your mortgage repayments when interest rates rise? Here are some steps you can take:
Save save save
Whether you’re on a fixed or variable rate, actively saving money could help borrowers prepare for larger repayments in the future, says Gregory Boustead home loan specialist at Domain Home Loans.
“If you are able to save that little bit extra every month or every week, start putting that money aside now,” he says. “That way, if rates do climb further, you’re in a position where you can move money from additional savings to your home loan.”
Make extra repayments
Try making extra repayments into your mortgage now. You could do this by making more frequent repayments, adding a little extra into your monthly repayments, or depositing a lump sum (like a tax refund).
Just check that your lender hasn’t placed any restrictions on making extra or more frequent repayments, especially if you have a fixed loan.
Build a buffer
If you have one, make some extra payments into your mortgage offset account. That money is then ‘offset’ against the balance of your home loan, so you only pay interest on the difference between the loan amount and the amount in your offset sub-account. This means you pay off the loan faster and with less interest.
Refinance your loan
If your current lender’s interest rates are on the high side, it could be worth asking them for a better deal, particularly if you now have a decent chunk of equity built up from the recent house price boom. If you have been diligent with making repayments on time, your bargaining power could be significantly stronger.
If your current lender isn’t willing to budge, it may be time to switch to another lender with a more competitive rate. With both investor and owner-occupied loans starting with a 1, and no monthly or ongoing fees, you could save thousands.
As always, the team and Love & Co are here to answer any questions you may have about the impacts on the local property market and help guide you with any decisions you may need to make. Feel free to reach out to your local Love & Co office today.
Credits:
Realestate.com.au
Mypropertyinvestment.com.au
Domain.com.au
realestateview.com.au
Economist.com