Record-low rates may soon be a thing of the past, with economists tipping the Reserve Bank of Australia (RBA) to start increasing the 0.10 per cent cash rate as early as June this year.
For buyers and owners alike, the timing and magnitude of any rate rise will be closely watched, as an increase could mean hundreds of dollars more in mortgage repayments per month.
When the RBA increases the cash rate target, often referred to as the official interest rate, lenders typically pass the change on to customers in the form of higher interest rates on variable home loans.
If interest rates went up by 0.25 of a percentage point, borrowers who have taken out a $500,000 loan on a 30-year term could expect to pay an additional $65 per month on their mortgage. For those with a $1 million loan, it could mean an additional $131 per month.
So when could interest rates rise, and what can borrowers do to prepare?
When will interest rates rise?
Until late last year, the RBA’s central scenario was that economic conditions requiring a rate rise wouldn’t be met until 2024.
But the recent rise in inflation, low unemployment putting pressure on wage growth and rate adjustments by other central banks have all increased the likelihood of a rate rise sooner than previously expected.
While an increase is on the horizon, the RBA is in no rush to lift the cash rate, says Dr Diaswati Mardiasmo, PRD Real Estate’s chief economist.
“At the very, very earliest they could lift in the second half of 2022,” she says. “But, with the uncertainty that comes naturally with the federal budget and federal election, I wouldn’t be surprised if they held off until the later part of 2022.”
While the outcome of the federal election could play a part in when the rate change occurs, inflation levels and wage growth would take precedence in the decision, Dr Mardiasmo says.
But while inflation is currently high, and will continue to climb due to ongoing supply-chain issues and developments in global energy markets, Dr Mardiasmo says the RBA is prepared to wait and see whether these pressures sustain inflation before lifting rates.
Another factor the RBA is prepared to patiently wait out is wage growth.
“The RBA has said that they would like to see wage growth anywhere between 3 to 4 per cent,”’ Dr Mardiasmo says. “At the moment our wage growth is still under 2 per cent, so we’re not there yet.”
What can you do to prepare for an interest rate rise?
While the prospect of rising interest rates can be nerve-racking, there are things property buyers and owners can do now to soften the impact.
1. Review your budget
In times of financial uncertainty it’s important to review your budget, says Laura Higgins, senior executive leader of the Australian Securities and Investments Commission’s Moneysmart.
“Make sure you can meet your financial commitments now, but also [ensure] you’re organised in a way that you can meet your future commitments should interest rates change,” she says.
Building up a sizeable buffer in your budget now could help you stay on track when rates rise in the future, says Marcus Russell, senior home loan specialist at Domain Home Loans.
“People are making things work with their current budget, but if interest rates suddenly rise they may find themselves in the red,” he says. “Building up a stable buffer now could help set you up for the future.”
2. Get a better deal
Locking in a lower interest rate now could help save you thousands of dollars in repayments on your mortgage in the future.
For current homeowners, Ms Higgins says it is worthwhile exploring options beyond your current bank or lender.
“Many times new customers are offered a better deal than existing customers,” she says. “If you haven’t revisited your home loan with your bank for a few years, you could potentially get a better deal and save quite a bit of money by switching.”
3. Review your loan structure
Looking at the current arrangements of your home loan and assessing whether they still suit you is an important part of preparing for a rate increase, says Ms Higgins.
“Are there additional costs you’re paying, for instance, because you perhaps have an offset mortgage, but maybe you’re not using it that way?” she says. “This is a conversation you may want to have with your current bank or lender.”
Mr Russell says it’s important to check in with your home loan regularly, regardless of what interest rates are doing.
“I recommend thinking about it every six months, talking to a significant other about it once a year and talking to a professional or your broker every one, one-and-a-half years,” Mr Russell says.
4. Make extra repayments
“Interest rates have been low, but they probably won’t be this low forever,” Ms Higgins says. “So, making some extra repayments now could be beneficial.”
Mr Russell says making additional payments of $200 or $250 per month could safeguard you when interest rates rise: “Making extra repayments to your mortgage or syphoning off extra money into a separate account or your offset facility could pay dividends in the long run.”
5. Know your lender’s hardship provisions
Understanding your lender’s financial hardship provisions is an important part of preparing for a rate increase, Ms Higgins says.
“If people are struggling to make repayments the first place to start is with their bank or lender,” she says. “Your lender should have support available for their customers and options to assist people when they are suffering from hardship, particularly if it’s short-term.”
For more significant or long-term financial difficulties, Ms Higgins says free financial services such as the National Debt Helpline (1800 007 007) are available.
Article Source: www.domain.com.au
The RBA has lifted the cash rate to 0.35 per cent. Here’s what it means for home buyers and owners
Borrowers could see higher mortgage repayments within weeks, with the Reserve Bank of Australia (RBA) increasing the official interest rate for the first time in more than a decade.
The RBA board on Tuesday decided to increase its cash rate target by 25 basis points to 0.35 per cent, in a bid to control inflation which, according to the most recent figures from the ABS, is rising at its fastest pace in 21 years.
So now that the cash rate has gone up and is predicted to continue rising over the coming months, what will this mean for home buyers and home owners with mortgages?
How will rising interest rates affect home buyers?
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.
With interest rates and mortgage repayments now rising, some potential borrowers may see a reduction in the maximum amount of money they could otherwise have borrowed, as lenders look to ensure that borrowers will be able to continue repaying their home loans, even at higher interest rates.
Buyers may experience different levels of reduction to their borrowing power, depending on their circumstances and the lender, says Gregory Boustead, home loan specialist at Domain Home Loans.
How much will mortgage repayments increase when interest rates rise?
It’s the million-dollar question on home owners’ minds: When will interest rates rise and how will that affect home loan repayments?
While economists and the big four banks expect the Reserve Bank of Australia (RBA) to increase the cash rate target from June, no one knows for certain when rates will rise and by how much.
But whether you’re on a fixed or variable rate home loan, it’s worthwhile reviewing your mortgage before the cash rate increases, says Lianna Mills, senior home loan specialist at Domain Home Loans.
“Sitting and waiting for [an increase] to happen will not benefit home owners,” she says. “It’s important to look at your home loan now.”
So when are interest rates expected to go up and how high are rates predicted to rise?
When will interest rates rise?
The conditions for a cash rate hike – full employment, sustained wage growth and increasing inflation – are expected to be met in June, says AMP Capital’s chief economist, Shane Oliver.
“You can make an argument conditions have already been met,” he says. “But the Reserve Bank doesn’t want to raise rates in an election campaign, so they won’t be hiking in May.”
If interest rates do rise in June, borrowers with variable-rate home loans may have about a month to prepare for an increase in their mortgage repayments.
But how high the cash rate will rise could be the difference between paying tens of dollars or hundreds of dollars more per month.
Each month, the Reserve Bank of Australia (RBA) board meets and sets the cash rate target, sometimes referred to as the “official” interest rate. The cash rate serves as a benchmark for home loan interest rates, which are normally a few percentage points higher. Lenders often adjust their variable interest rates based on movements of the cash rate, but aren’t obliged to do so.
What could the first interest rate hike be?
The RBA has historically moved the cash rate in 0.25 per cent increments. Therefore, it’s possible the RBA will move in line with historic trends, Mr Oliver says.
“The general expectation is that the first hike will be to get us back to 0.25 per cent, which will be a 0.15 per cent hike,” he says. “Thereafter, the Reserve Bank would move in 0.25 per cent increments.”
Source: Domain Home Loans Repayment Calculator
The above table shows the approximate amounts monthly home loan repayments could increase if interest rates rise. Based on a 30-year principal and interest loan with an initial 2.5% interest rate. Information is intended as a guide only. Fees and charges excluded.
If the cash rate increased by 0.15 per cent, borrowers with a $500,000 mortgage on a 30-year term could expect to pay an additional $39 per month on their home loan repayments. For those with a $1 million mortgage, it could mean an additional $79 per month.
However, it’s possible the RBA will conclude that 0.15 per cent is too small of an increase, and may start with a larger hike to show a stronger commitment to keeping inflation down, Mr Oliver says.
“I think this first hike might actually be 0.4 per cent,” he says. “If we work on the basis that the RBA wants to get back to 0.25 per cent increments, they may want [the target] at 0.5 per cent and, to do that, they’ve got to go 0.4 per cent.”
If the cash rate increased by 0.4 per cent, borrowers on the same $500,000 mortgage could expect to pay an additional $106 per month. For those on the same $1 million mortgage, it could mean an additional $211 per month.
How high could interest rates get?
Much like asking when the cash rate will rise, economists will tell you there’s no easy answer when it comes to how high the cash rate will climb over time.
“It’s a bit of a guessing game at this point,” Mr Oliver says. “We don’t know how households will respond to increases in interest rates for the first time since 2010, particularly given that they’re coming from record lows.”
But because of increased levels of household debt, Mr Oliver says the RBA won’t need to raise interest rates to 5 or 6 per cent, as they have done historically, to get inflation back under control.
He expects the cash rate to reach 1 per cent by the end of 2022 and 1.5 per cent by 2023. Thereafter, if inflation substantially decreases, he expects the rate could drop again.
The big banks offer mixed forecasts for the peak of the rate-tightening cycle. Commonwealth Bank expects the cash rate to peak at 1.25 per cent in early 2023, while Westpac predicts a peak of 2 per cent in mid-2023. ANZ expects the cash rate to reach 2 per cent by the end of 2023, and NAB has forecast a peak of 2.25 per cent by the end of 2024.
Article Source: www.domain.com.au
Do you really need to save a 20 per cent deposit?
More first home buyers are giving up on saving a 20 per cent deposit, as sky-high property prices blow out the time it takes to pull together a down payment on a home.
Aspiring homeowners have been flocking to government loan guarantee schemes and the bank of mum and dad in a bid to get into the market faster amid rapidly rising prices. Others are forking out extra money for lenders mortgage insurance, so they can buy with a smaller deposit.
“It’s not really the goal,” Melbourne mortgage broker Daniel Koutzamanis, director of BLVD Finance, said of reaching the traditional 20 per cent deposit. “With first-home buyers, the conversation is more around what’s the minimum I need … to get a foot in the door.”
Few of his first home buyer clients have saved a 20 per cent deposit and were instead taking out lenders mortgage insurance, which is required when borrowing more than 80 per cent of a property’s value.
About 30 per cent of clients had turned to their family for a cash gift or loan guarantee, waiving the need for LMI. The federal government’s now rebranded and expanded Home Guarantee Scheme has also proven popular, but spots for those buying existing properties ran out quickly.
It was a similar story on Sydney’s northern beaches, where at least a third of first home buyers were getting help from the bank of mum and dad via a cash gift, loan or guarantee, said mortgage broker James Algar, principal at Mortgage Choice Dee Why. However, the government scheme was of little use there, with entry-level unit prices topping the price threshold.
“First home buyers are still striving to get to that 20 per cent, but not a high number are actually getting to it, especially not in our area,” he said.
Already almost 60,000 people have used the Home Guarantee Scheme, which enables first home buyers and single parents to purchase with a 5 per cent and 2 per cent deposit respectively, without the need for LMI. Another 50,000 places will now be available per year, as announced in last week’s federal budget.
“[Saving a 20 per cent deposit has] really become unrealistic for a lot of people, the expansion of the scheme is … an admission that it’s very hard, and getting harder,” said Richard Whitten, editor of home loans at Finder.
First home buyers were often encouraged to cut back on small daily pleasures and buckle down on spending to save a deposit, Mr Whitten said. But such sacrifices barely made a dent in the time taken to save a deposit, given property prices nationally climbed 18.2 per cent over the past year to $738,975, on the latest CoreLogic figures.
Prospective homebuyers in Sydney would need to give up 52,191 takeaway coffees to save enough for a median home deposit, Finder modelling shows, or skip more than 11,000 meals out. Their Melbourne counterparts would need to skip about 35,700 coffees or some 8050 meals out before the savings equated to a 20 per cent deposit.
“People fixate on coffee or brekkie out, but that doesn’t help that much, it’s overall budgeting,” he said, noting larger scale switches like finding a more affordable rental or moving back home with family, where possible, had a much greater impact on savings.
Though buying with a smaller deposit resulted in higher repayments, and more money spent on interest, first-home buyers would still be better off buying sooner rather than later in a rapidly rising market, Mr Whitten said.
However, with price growth flattening, the pressure on first home buyers had eased slightly, and those close to a 20 per cent deposit might decide to spend a few more months saving rather than rushing to purchase now.
Mr Algar is already seeing some first home buyers, mostly those able to live in the family home, now delaying plans to purchase, deciding they would rather keep saving as prices were no longer running away from them.
“[They’re more likely to] say I’ll sit tight because I don’t think I’ll pay any more for a property in a year’s time,” he said.
For those close to a 20 per cent deposit, a few more months saving could give them greater lending options, Mr Algar said. For a smaller deposit, getting to at least 10 per cent, could see a big reduction in LMI costs.
He had yet to hear concerns from first home buyers about the risk of falling into negative equity, if they purchased with a small deposit in a cooling market, but felt it was something they should be mindful of.
Mortgage broker Anthony Landahl, managing director of Equilibria Finance, said some first home buyers were sitting back on their hands, but more due to affordability constraints, and he expected to see a pickup in activity with the expanded government scheme.
With interest rate hikes on the horizon, some first home buyers may be reluctant to borrow as much as they previously might have, but he felt there would still be many who borrowed to their full capacity.
More than half of his first home buyer clients were not saving a 20 per cent deposit, and those who needed assistance were more likely to turn to family help than the government schemes, which had limited availability, and price caps that were too low in some markets.
Article Source: www.brisbanetimes.com.au
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