Property finance expert Bushy Martin goes beyond the hype and headlines to help you navigate rising interest rates in Australia.
With interest rates rapidly rising in Australia, many homeowners and investors are feeling nervous about how they will be impacted through changes to mortgage repayments, borrowing capacity or property values.
In this blog, we separate fact from fiction, unpacking where interest rates are heading and how you should respond.
Inflation and interest rates in Australia
Firstly, how did we get here?
Interest rates have been rising faster than most experts predicted. This is because inflation has been rising faster than the Reserve Bank of Australia expected. Inflation could hit 6 or 7 percent, which is a long way above the sustainable range of 2 – 3 percent.
With responsibility for monetary policy and the health of the Australian economy, the RBA is increasing interest rates in the hope of reducing consumer spending, stopping price rises and therefore slowing the rate of inflation as quickly as possible.
The cost of interest rate rises
There are more than 10 million homes in Australia, and around 6 million have home loans attached to them with the majority on variable interest rates. So when the RBA increases the rate, most of us feel the pinch.
To break it down in practical terms, a rise of 0.1 percent on the average $600,000 loan adds about $34 a month to your repayments. While an increase of a full percent sees you paying an extra $340 a month. That hurts!
You’re probably wondering how high interest rates will go. No one can say for sure. The RBA will only do the minimum to keep inflation at bay. Some experts say we could go from the COVID-related record low of 0.1% to around 2% by end of year and as high as 2.6% by mid 2023. No matter what happens, it pays to be prepared.
What should you do about the interest rate rises?
It depends on your situation and your risk appetite. As we often say, plan for the worst
and then expect the best.
If you’re a current home owner:
Start by finding out exactly what increased rates will do to your repayments to ensure you can afford it. And make sure you’re ahead in your repayments or have a healthy three to six month rainy day savings buffer in your offset account to cover any tight periods.
If you’re looking to minimise your home loan repayments, I’d suggest sticking with discounted variable rates. Get in touch with us to ensure you’ve got the lowest cost loan, as our team is saving borrowers anywhere between $400 to $1200 per month simply by refinancing and restructuring.
If you’re a home borrower who can’t deal with uncertainty and wants certainty of repayments, then don’t fix your whole home loan because fixed rates are now much higher than variable rates, but consider splitting your loan by fixing part of your loan, but leave an amount variable so that your offset account still operates and you’re still able to make extra payments, as most offset accounts cease to work when you fix the rate.
If you’re a property investor:
It is crucial to reach out to a savvy mortgage broker to ensure that your loan structure and costs are minimised while preserving maximum tax deductibility and maximum borrowing capacity with minimum risk.
Times of change like these create the best property opportunities. And a small window is opening up now that smart investors can take advantage of.
Property price growth is softening, plateauing and starting to fall in some areas around the country, which is normal after the recent period of sharp growth of between 20-30% per annum, against the long term national average of 6.8% annual capital growth that has been experienced over the last 30 years.
And given that property values in an area generally follow an S curve growth cycle over 15 years or so, with 2-5 years of strong growth followed by a 5-10% price correction before plateauing, it’s expected that A grade properties will hold their value but property prices for B Grade properties in B Grade locations will be flat and declining.
If you’re a property buyer:
If you’re ready to buy, much of what we just outlined for investors is relevant for you too. There may be opportunities to enter the market at a better price that you would’ve got over the last couple of years, but bear in mind that pricing for top properties are likely to stay strong.
If you’re a renter who’s looking to become a potential home buyer:
Start paying notional rent at the level of a higher mortgage with the extra going into savings to ensure that you’ll be comfortable affording the increased repayments when you buy a home, and at the same time you’re increasing your deposit.
If you’re a property seller:
You either need to move quickly or leave it for a few years, before property values climb again, but if you bought your property some years ago, you’re still likely to realise considerably more equity than the price you originally paid for the property.
Final advice, irrespective of your property position:
Stop reading the newspaper and following the news, so you turn off the deluge of ill founded and over inflated negative noise. This will instantly bring peace of mind and greater clarity.
Want to dig in to the detail of inflation and interest rates?
KnowHow’s Bushy Martin went deeper in a podcast here.
Now is the time to take action
Now that you have some direction, it is time to get proactive. You don’t have to become a victim of the circumstances. Whether you need to refinance, invest, buy or sell, you need expert support to get the right strategy and the best finance deal for your needs.
The finance architects at KnowHow are standing by to help you. Start by scheduling a no obligation discussion about where you’re at, and where you’re heading.