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With APRA’s (Australian Prudential Regulation Authority) recent increase in serviceability rates to limit the amount prospective home loan applicants can borrow, experts now expect a rise in home loan interest rates to follow soon. So, if an interest rate is around the corner, what does it mean for existing and prospective borrowers, and what steps can you consider taking?
When are interest rates likely to rise?
Despite inflation levels rising to 2.1%, which is within the RBA’s (Reserve Bank of Australia) target range of 2-3%, historically, rates have increased after a few quarters of consistent inflation rise. While many believe that the RBA will probably hike interest rates by the end of 2022 or the beginning of 2023, this is debatable and is likely to happen if inflation continues to rise at its current level for a few quarters.
What impact will an interest rate rise have on the property market?
Property prices are a function of demand and supply. Currently, demand is high due to rock bottom interest rates. At the same time, supply has not been able to keep up with the increase in buyer interest resulting in unprecedented surges in property prices. While an increase in interest rates will dampen property purchase appetite, it is essential to remember that the current developments in the property market are playing out in the absence of immigration. The rise in immigration may offset the decline in demand due to an increase in interest rate. Lastly, the increase in interest rates will be gradual such that it does not lead to any significant shocks to the housing market, giving existing and prospective borrowers sufficient time and room to plan their next moves. Historically, the Australian property markets have rarely seen a massive dip in prices.
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What can you consider doing?
- Prospective borrowers: if you want to purchase property, you can expedite the process by acting fast but not recklessly. Consider engaging a mortgage broker that can guide you on your purchase strategy, the right home loan and hacks on entering the property market sooner. For best practices on purchasing property in a booming market, click HERE.
- For existing borrowers: An interest rate hike implies larger repayments. Consider paying in extra into your mortgage. The more repayments you make at a lower interest rate, the sooner you can pay off your mortgage. Ensure that your rate is competitive. If your property has appreciated and increased equity, you are probably eligible for a lower interest rate. Unfortunately, lenders typically pass on lower interest rates only to new customers. Calculate your equity and check if your lender is charging you the same interest rate for your equity slab as it is charging new borrowers. If there is a gap, have a discussion with your lender regarding a correction. Finally, if you are looking to get the best of both worlds, consider opting for a split loan – a loan where you attach a portion of your loan to a fixed interest rate and leave the remaining on a variable rate.
The most straightforward way to plan your next steps in the wake of a potential rate increase is to rely on the professional guidance of a mortgage broker. Brokers usually receive a commission from the lender when they settle a loan. Their services are generally free for borrowers. Not only will a broker scope the market on your behalf for the right home loan fit, but they will also manage your loan paperwork and keep you posted at every step of the application process.
Reach us for the best way forward as per your circumstances.
The information is a compilation from various sources for your benefit and should not be relied upon in lieu of appropriate professional advice.