If you have a mortgage on a variable rate, this week would have brought an unwelcome (though not unexpected) letter or email, letting you know that your interest rate has just gone up and accordingly, repayments will be going up with it.
On the plus side, for those that benefited on the other end as interest rates reduced but chose not to recalculate their repayments, you’re going to be ahead of schedule and should have that all important buffer to help lighten the load on this end. If you made the most of the option to lower repayments or you have signed on for a new mortgage since about mid-2020, then you might not feel quite so comfortable.
This week’s announcement is likely to be just the first of many (hopefully not TOO many) as the Reserve Bank of Australia (RBA) seeks to put the brakes on inflation by limiting the availability of cheap credit which has partially fuelled runaway prices in just about every field. There isn’t much they can do about issues overseas, but this is at least one lever they can pull, following similar actions in NZ, the US and other nations.
There are some pretty dire predictions floating around when it comes to property prices off the back of these incoming rate rises, and there will absolutely be pain to come for some – particularly anyone that maxed out their borrowing for a new home or investment in Sydney or Melbourne in the past 12 months. A (potential) 2% increase is pretty daunting on a $2 million mortgage for your home. Looking closer to home though, there is less to fear with dramatically lower prices (and mortgages), and rental yields that can significantly outpace the capital cities, which have been more reliant on capital growth for returns.
Even accounting for higher borrowing costs, rental prices locally (which continue to rise) still provide the opportunity for cash flow positive (or at least neutral) investment. Obviously, this will continue to change, but you’re still starting on the right side of the ledger (as opposed to being cash flow negative at 2% interest rates). While tenants might feel insulated without mortgages of their own, unfortunately landlords with increasing costs are more likely to maximise their income to offset, so look out for this to flow on at lease renewal time.
Tom Quaid is the REIQ Zone Chair for Cairns