For hopeful homebuyers, especially first-timers, the high interest rates might feel like the nail in the coffin on top of exorbitant house prices.
However, the cash rate going up isn’t necessarily all bad news, especially if you’re thinking of buying soon. Let’s look at what it means for you, and what you can do to protect yourself from rising interest rates.
1. Let’s put the rate increase into perspective.
Interest rates had hit an all-time low of 1% in 2019 and were driven further into the ground by the pandemic, to 0.1% in November 2020.
For three decades prior, through global recessions and economic slumps, the RBA cash rate hovered somewhere between 3.89% and 17.5%.
In case you missed it: the cash rate hit 17.5% in the 1990s. People bought homes with a 19.5% interest rate ‘cherry’ on top of their loans.
The fact is, if something is at rock bottom then the only way to go is up. The rate changes were always going to happen. Even with the current rise, rates are still well within ‘normal’ numbers, and low compared to previous highs and the historic average.
2. You can decide to make sure you can afford it.
In 2014, lending laws changed, and lenders were no longer required to measure hopeful borrowers against a 7% interest rate. Removing the safeguard may have made sense at a time when an economic boom was needed, but in a 2021 mid-pandemic world with minuscule interest rates, the lack of safeguard is what’s getting people into trouble.
You can protect yourself by asking your mortgage broker to use 7% as the yardstick for your loan serviceability. It might mean you can borrow less, but you’ll have a better chance of comfortably riding out the normal fluctuations of the cash rate.
The RBA has all but guaranteed rates will rise again, and likely this year. Using a higher interest-rate model helps you future-proof yourself and make hay while the sun shines as housing prices settle into ‘affordable’ again (see #3).
3. Higher interest rates help correct the market.
In 2021, property prices around the major eastern cities rose by over 25%, which is astronomically more than anyone could have anticipated. A lot of buyers were priced out of the market.
On the surface, it makes sense to think that higher interest rates will make buying harder, but the opposite can happen: tougher lending conditions should help correct the wild uptick.
Higher interest rates mean people are more cautious about throwing half a million extra onto a property. They have to be able to service the loan, and a difference of 2% to the cash rate can equal $1,000 or more a month extra on their repayments.
Lending criteria will get tougher, which should slow the buying frenzy. We’re already seeing auction rates softening. In May, Sydney’s auction clearance rate had plummeted to 59%, down from 80% in October. The white-hot demand has cooled. Houses are staying longer on the market, and there’s now a little more wiggle room for negotiation.
4. There are options for saving on interest.
Knowing more rate rises are coming, you can capture a good deal by fixing your interest rate at the current amount.
Have your broker show you the options for fixing your interest rate, or a combination of fixed and variable, to see how it changes your repayments. Usually, you can fix for up to three years. And of course, make sure you can still afford your loan after the fixed term is up and you’re back onto a variable rate.
When you have your loan locked in, do an annual check to make sure you’re getting the best deal. You probably won’t be able to refinance during a fixed period, but after that, switching between lenders for the best deal can save you hundreds on interest each year.
5. Leave margin for rates to change.
The fact is, homebuying is affordable if you buy within your means, regardless of economic factors or interest rates. If you work with an independent mortgage broker and set yourself up with a plan, you can find a home that fits your budget even if rates rise. A well-planned mortgage should be able to ride the highs and lows without too much drama.
Buying a new home rather than an existing one removes a lot of the factors that cause house prices to skyrocket. There’s far less competition for house and land packages, and prices are fixed so you know exactly what you’re going to pay with no surprises.
While available land has been tight recently, we’re seeing plenty of lots opening up for reasonable prices. The government grants – the First Home Owner’s grant, stamp duty concession and the First Home Super Saver scheme – are allowing people to help cover some of the initial deposit. We also offer a $15,000 Insignia Homes Builders grant for customers to give them a leg-up into a new home.