With more lenders increasing their rates independently, the Reserve Bank of Australia (RBA) has left the cash rate on hold at 1.5% this month.
On the housing front, the initiators for this move were declining home prices, a drop in dwelling approvals and a fall in investment credit growth.
Given this, economists predict the Australian economy will slow in 2019, and the RBA will elect to cut rates later in the year if there are no signs of improvement.
Rate hikes, declining home prices and dwelling buying
Since September 2018, several lenders – ANZ, the Commonwealth Bank, NAB, Westpac, ING, Virgin Money and the Bank Of Queensland (BOQ) – made rate hikes independently of the RBA’s official cash rate.
Varying from 0.12% to 0.20%, the changes to these lenders’ rates are as follows:
|Rate Rises to Standard Variable Rates Since September 2018|
|Lender and Loan Type||Initial Advertised Rate||Rate Change||New Advertised Rate|
|Owner Occupier Principal & Interest||5.2%||+0.16%||5.36%||Investor Principal & Interest||5.8%||+0.16%||5.96%|
|Owner Occupier Interest Only||5.75%||+0.16%||5.91%||Investor Interest Only||6.26%||+0.16%||6.42%|
|Owner Occupier Principal & Interest||5.22%||+0.15%||5.37%||Investor Principal & Interest||5.8%||+0.15%||5.95%|
|Owner Occupier Interest Only||5.77%||+0.15%||5.92%||Investor Interest Only||6.24%||+0.15%||6.39%|
|Owner Occupier Principal & Interest||5.24%||+0.12%||5.36%||Investor Principal & Interest||5.8%||+0.16%||5.96%|
|Owner Occupier Interest Only||5.77%||+0.16%||5.93%||Investor Interest Only||6.25%||+0.16%||6.41%|
|Owner Occupier Principal & Interest||5.24%||+0.14%||5.34%||Investor Principal & Interest||5.79%||+0.14%||5.93%|
|Owner Occupier Interest Only||5.83%||+0.14%||5.97%||Investor Interest Only||6.30%||+0.14%||6.44%|
|Owner Occupier Principal & Interest||4.64%||+0.20%||4.84%||Investor Principal & Interest||4.94%||+0.20%||5.14%|
|Owner Occupier Principal & Interest||5.70%||+0.18%||5.88%||Investor Principal & Interest||6.33%||+0.18%||6.51%|
Sources: ANZ, Commonwealth Bank, NAB, Westpac, Virgin Money & BOQ
With rates rising, auction clearance volumes have fallen and the time taken to sell a dwelling has also increased. Financial experts suggest these occurrences happened because borrowers are tightening their belts and preparing for tighter economic times, rather than stretching their resources to cover a mortgage. As a result, property supply is outweighing demand and creating a buyer’s market.
So, what does this scenario mean for a prospective home buyer?
If you’re looking to buy a home, do the maths and make sure you’ve got your finances in order. Calculate if you can afford to repay a mortgage at 7% to 8% without putting a strain your finances, as this will meet current lending requirements.
If the maths check out, then now may be an excellent time to search for the right property as the selection is more substantial and you can negotiate on price. With fewer buyers in the market, you’re also more likely to secure a property that meets your requirements and budget.
Falling dwelling investment, rate hikes and investors
In the February Monetary Policy, the RBA reports that property investment appeared to peak in the third and fourth quarters of 2018.
They note that while some projects are still coming to fruition, others are finding it difficult to gain approval due to financial restrictions, which is resulting in project cancellations. Building approvals were also at a five year low.
Given these circumstances, the RBA predicts that property investment levels would remain high short-term, with approved projects reaching completion. But, these levels will later decline due to funding restrictions stalling new projects.
CoreLogic RPData also reports that investor lending has been declining for some time. During December 2018, investors took out $7.5 billion in housing finance, 4.8% lower than November and the lowest borrowing figure since April 2013.
Looking more carefully at CoreLogic data, some $4.9 billion of investor finance is new, while the remaining $2.6 billion is refinancing-related. This information suggests that investors are looking to secure a better deal
How does this affect property investors?
Investment funding costs are now higher since lenders split owner-occupier and investment lending. Regulators have also restricted the number of interest-only loans and lenders have made these more expensive with higher rates.
As an investor, it’s therefore essential that you calculate what you can comfortably afford to borrow and still leave yourself with adequate cash flow. It’s also vital that you have a sound investment plan with contingencies in place, giving you a financial buffer if needed.
If you’re looking to buy property, then consider your borrowing power and ability to service a mortgage that has a higher interest rate before approaching a lender. This strategy will improve your rate of approval success and also see you avoid feeling the pinch when rates rise.
Beating rate hikes
Whether you’re looking to buy property as an owner-occupier or investor, it’s difficult to keep tabs on your home loan with lenders making independent rate hikes.
If you’re feeling financial pressure and you don’t think your budget will stretch to cover rate increases, then now may be the time to make changes to future proof your loan. An eChoice broker can help you to compare the market and review home loan features and rates to potentially find a better deal.