A lot of interest in Interest Rates

Whether its next week or in June post Federal Election.....

Whether its next week or in June post Federal Election, the way the world looks at the moment we are almost guaranteed an interest rate hike by the Reserve Bank (RBA) in the very near future – the first increase to the official rate since 2010 and literally the first time that a generation of borrowers (myself included) will have seen a move in the upwards direction.

It’s a scary headline, and a factor that a lot of people will be taking into account as they make their property plans – whether that be investing or upsizing (downsizers will be more sheltered from any increase). The fact is though, we have been dealing with a changing interest rate environment for a while now, its just been on the quiet.

Where for a short time there (late 2020 in particular) you could hang your hat on a fixed interest rate of 2% (or thereabouts), those kind of deals are now well and truly behind us – with a high 3 or low 4 a far more likely figure for those seeking to lock things in for the next few years.

Variable rates, which move more in sync with RBA decisions, have also been ticking up for some time, though not to the degree we’ve seen with fixed rates. There still seems to be plenty of options with a 2 in front, though this seems to be a fluid environment. Higher repayments are on the horizon, but aside from paying more each month, what other impact is this going to have for those in the market (or looking to get in?).

For existing property owners, the past couple of years have provided an opportunity to build a buffer in your mortgage, with lower interest rates but repayments kept the same allowing for more principal to be knocked off early. Additionally, with banks requiring a buffer of 2.5-3% interest rate movement in their assessment of affordability, the theory is that an increase will hurt but shouldn’t be a mortal blow and most people should manage to varying degrees.

If you haven’t found a property yet, expect rising rates to have some impact on your affordability as higher rates mean a lower principal amount that can be borrowed. Tighter budget makes it harder to compete, especially in the lower ranges where various government programs are working to get more buyers into the market. With an unrelenting rental demand however, there is still incentive to get into the market and the balance between moving now or a wait and see approach can be fine. As always, whatever the decision to be made, talk to your mortgage broker for the right advice.

Tom Quaid is the REIQ Zone Chair for Cairns