Mortgage Rates on the Rise: What it Means for Homeowners and Prospective Buyers

The Reserve Bank of Australia (RBA) has raised the official cash rate to 3.35% – the highest level since late 2012 – with economists predicting further hikes at the next RBA board meeting in March 2023. This marks the ninth consecutive rate hike since May 2022 and means borrowers have been affected by an extra 325 basis points (bps) on their home loans over the past ten months. The RBA’s tightening cycle aims to curb high inflation.

IMPACT ON EXISTING HOMEOWNERS:

Homeowners:

The recent Reserve Bank of Australia (RBA) rate hikes are having a major impact on the mortgage and investment markets. Here are some key points to consider:

• Higher mortgage repayments
• Need for tightening of household budgets
• Coming off fixed rates will be a shock for many, however there are some very competitive rates to be found
• Refinancing your mortgage now can save you thousands of dollars straight away and create some cash flow relief for families

However, even though the hikes are seen by some as a negative development, they can also have a positive impact on homeowners.

While mortgage repayments will go up, it’s important to consider the long-term effects of the interest rate hike.

With demand for property on the rise, especially in Melbourne, and the arrival of 55,000 overseas students looking for a place to stay, both property and rental prices are expected to go up, which in turn provides benefits for investor clients they are desperately chasing a higher yield to combat the higher mortgage costs.

With inflation forecast to stay up for the medium term to long term, rising borrowing costs and property prices forecast to rise, waiting too long to get back into the market may mean facing a difficult reality of not being able to get into the property market at the quality of property you were hoping for.

Subsequently people may settle to rent for longer and with rental prices going up, less ability to save for the property they would really like to own.

Investors:

For investors, the RBA rate hikes and increased demand for property present a unique opportunity.

Despite the rise in borrowing costs, property prices and rental prices are set to go up also, which combats the rising cost of finance, which means that investments in property are still expected to yield reasonable or strong returns.  This is great news for investors that pushed through the challenging economic times from the pandemic

This is particularly true in Melbourne, where the demand for property is high and rental prices are on the rise. With the cost of borrowing going up, it’s important for investors to consider their finances and plan accordingly.

With inflation forecast to stay up for the medium to long term, the future of property ownership may be a luxury and young people may need to rely on inheritance as their only means to access property ownership. If prices continue to rise along with high borrowing costs and the alternative rental prices keep rising, the gap in affordability for renters to switch may get to large and they become lifetime renters and follow a similar experience to people that live in the UK.

if you’re currently on a fixed-rate mortgage, reality is looming for when you come off your term.  That being said there are some very competitive rates available that could save you thousands in a very short term.  This is a critical moment, and the decisions you make now can have a significant impact on your financial future.

However, there is a solution: refinancing. Refinancing your mortgage can help you secure a lower interest rate, which will lower your monthly payments and save you money in the long run.

IMPACT ON PROSPECTIVE BUYERS:

For those looking to get a mortgage or invest in property, the RBA rate hikes mean that borrowing costs are going up. What effects does that have when applying for a homeloan?

• Increased Borrowing Costs: With higher interest rates, borrowing costs for prospective buyers will also increase, making it more challenging to secure a mortgage.
• Cautious Lending Practices: Lenders may become more cautious in lending money to prospective buyers, making the mortgage approval process more difficult.
• Higher Interest Rates: Higher interest rates mean that mortgage repayments will be more expensive, making it challenging for prospective buyers to keep up with their repayments.
• Reduced Property Prices: The cost of borrowing going up can also mean that property prices will come under pressure, making it harder for prospective buyers to get a good return on their investment.
• Lower Home Values: Higher mortgage rates can also lead to lower home values, making it more challenging for prospective buyers to build equity in their home.

It is also important for prospective home buyers to consider the long-term effects of the interest rate hike and plan their finances accordingly.

WHY A MORTGAGE BROKER CAN HELP

So, what can you do to protect yourself in this changing market? A mortgage broker can help you navigate the complexities of the mortgage market and find the best deal for your specific circumstances. They have access to a range of lenders and mortgage products, so they can help you find the right mortgage that meets your needs and budget. This means you can compare interest rates, fees, and other important details to find the best mortgage deal that suits your needs.

A mortgage broker can also help you understand the impact of the RBA rate hikes on your existing mortgage. If you’re coming out of a fixed-rate mortgage, they can help you re-finance to a more suitable product that will better meet your needs in a rising rate environment. By working with a broker, you’ll have access to the latest market information and expert advice, which can give you a significant advantage over those who go it alone.

Moreover, they can also help you navigate the refinancing process, ensuring that you secure a lower interest rate and reduce your monthly payments.

The RBA’s interest rate hike has implications for both existing mortgage holders and those looking to buy a home. It is important to take into consideration the potential impact on finances.

Although property price falls are expected to continue and accelerate in 2023, a lower interest rate peak and earlier-than-expected interest rate cuts could ease the situation. Careful planning and seeking professional advice can help navigate the challenges posed by the RBA’s interest rate hike.

ARE THERE ANY BENEFITS TO THE RBA’s DECISION TO RAISE THE CASH RATE?

As with most things, there are both an upside and downside to the Reserve Bank of Australia’s (RBA) recent decision to raise the Cash rate to 3.35%.

Pros:

• Stronger economy: The rate hike is a sign that the RBA believes the economy is growing and can withstand the increase in borrowing costs.
• Increased saver returns: The higher cash rate will likely lead to higher returns for savers, as banks pass on the increased cost of borrowing to their customers.
• Reduced inflation: The RBA raises rates to combat inflation, and a higher cash rate may help keep prices in check, protecting the purchasing power of consumers’ money.

Cons:

• Higher borrowing costs: With higher interest rates, borrowing costs will increase, making it more expensive to take out a loan, including mortgages and personal loans.
• Reduced consumer spending: Higher borrowing costs can lead to reduced consumer spending, as people have less disposable income to spend on non-essential items.
• Negative impact on property market: The higher interest rates could put pressure on property prices, making it more challenging for prospective homebuyers to secure a mortgage and for existing homeowners to build equity in their homes.

Overall, the RBA’s decision to raise the Cash rate is a double-edged sword, with both positive and negative consequences for individuals, businesses, and the economy as a whole. It is important for each individual to consider their unique financial situation and understand the impact of the rate hike on their personal finances.

Do you think the recent changes and announcements will be impacting you? Make sure you book an appointment with one of our brokers to discuss you individual circumstances and how to best navigate through the changes to get an outcome suitable for you and your needs.

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