While the Reserve Bank (RBA) left rates on hold, it’s only a matter of time before rates rise. As RBA Governor Philip Lowe recently said, the next time rates move, it will likely be up. Although, he added it would be sometime before this occurred. So, the message is clear for those already mortgage stressed – consider your financial position now, rather than later.
Economists suggest that Governor Philip Lowe’s statement relied on RBA market data. Plus, they said it is an optimistic economic growth forecast – with the RBA aiming to move inflation towards 3%. Barriers to achieving this growth, at present, include unemployment and the higher valued Australian dollar. Plus, the RBA needs to keep the housing market restrained so that it doesn’t become overinflated.
As it stands, housing market conditions are shifting. Data shows that dwelling investment is currently high, according to the September RBA minutes. However, it has waned considerably in Western Australia and Queensland. Established housing market conditions also indicate that the market is easing, particularly in Sydney. Housing price growth is slowing in Sydney, and to a lesser extent Melbourne.
Housing credit growth across Australia remains steady with slower investor growth noted, but increased owner-occupier growth. Housing lending growth by major banks has also slowed, while smaller lenders saw an increase. Although, APRA measures and interest-only lending changes contributed to this change.
Average lending rates increased slightly in 2017, reflecting higher investor and interest-only rates. RBA members noted that the average interest rate on variable rate loans was 30 basis points below that of outstanding loans.
While home loan costs are lower, it’s important to remember that while the national average mortgage sits around $488,000, in Sydney’s overheated market the average mortgage is $600,000. So, according to the Housing Industry Association (HIA) it now takes two average full-time wages to service an average Sydneysider mortgage. The average monthly mortgage cost is around $4,729, or $57,000 a year for an average priced home.
Plus, research shows that some 600,000 to 800,000 Australians are already ‘at risk’ or stressed by mortgage repayments. So, the thought of interest rates rising becomes a concern. Rate rises are likely to put these people and many more under stress where a household’s income cannot cover their debts, including their mortgage.
Sometime ago, economists suggested that theoretically interest rates should be around 7%. But, the GFC changed the economic climate. The RBA also indicated that they foresee a neutral cash rate at 3.5%. At present, the cash rate is 1.5%. This insight means that lenders will borrow money at a 2% higher rate. Therefore, this cost will be passed-on to their borrower. As such, you can expect to pay at least 2%, maybe more, in home loan interest.
Based on the national average mortgage rate of $489,000, this means that you’ll be paying an extra $815 per month. But, if you reside in Sydney and have an average mortgage of $600,000, then you’ll be paying $1,000 more a month.
Once rates start rising, they won’t sit at the neutral rate. Not unless something goes wrong. So, let’s say the peak in rate rises stops at 5.5%. Then, the national average mortgage holder will be paying $1,630 a month, and the Sydneysider an extra $2,000 a month.
Image courtesy of ABC News – Australian Broadcasting Corporation
The good news though is there is no need to panic. The first rate rise won’t occur until mid-next-year and even then, it won’t be any more than 0.25%. So, it will be a couple of years before even the neutral interest rate is achievable. The only reason this plan will change is if the economy goes full steam ahead and inflation needs controlling. But, given the current position of the world’s economic climate that’s unlikely.
Therefore, if you have a mortgage, then it’s time to think about the future. While you’re enjoying a low interest rate, the reality is this is going to change. Consequently, you need to prepare yourself so you don’t experience mortgage stress. There are several ways to do this. These are as follows:
- Get your budget in order now.
- Keep a diary of your spending.
- Reduce your spending on luxury items.
- Pay more off your mortgage now.
- Look at refinancing.
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A mortgage broker can help you assess your existing mortgage, negotiate with the lender on your behalf and could find you a better deal. Good mortgage brokers also offer you a personalised service and a wide selection of lenders to choose from. Plus, they compare home loans for you, so they take the guesswork out of finding a more affordable mortgage.
The benefits of using an eChoice mortgage broker are many:
- Brokers act as a liaison – your mortgage broker discusses your needs with you, then they talk to a lender on your behalf. So, you never have to deal with a lender directly.
- The broker does all paperwork – you don’t have to fill out any paperwork, your broker does this for you. They also submit the loan application on your behalf.
- A broker compares loans – the thought of looking through home loans and comparing them to each other is daunting. But, a broker does this for you based on your needs and requirements, comparing loans from over 25 lenders.
- No up-front fee – eChoice brokers don’t charge for their service when finding the right mortgage for you. Instead, they collect a lender commission or payment after home loan approval.