Alright, so there are a few things that you need to understand first before we discuss what high-interest rates mean for the Aussie marketplace!
Other than the obvious – that it’s shit – there is a reason. I’m going to break it down into a map so it makes more sense!
Let me address one PO-factor that I’m passionate about. The media hype this topic up and instill fear onto Aussies, causing unnecessary stress and anxiety. The bottom line is: IF you want to buy a house, you need to save. Once you have enough for a deposit, you can buy something. There is no magic formula or timeline/pressure unless you have set one for yourself. Take it at your own pace if you can! Rushing causes costly mistakes.
Shout out to Britney T for requesting this weeks topic! <3
Let’s dive in!
Why are interest rates up?
Interest rates are up because of inflation.
Inflation is the increase in prices of goods and services that households buy: E.g., Netflix subscriptions, or your fruit and veg. (if you’re like me, shnacks are at the top of my shopping list).
Inflation has been caused by 2 main factors:
1. The war in Ukraine.
2. The demand for supplies in Australia post the pandemic.
So, the RBA (Reserve Bank of Australia) – puts up the interest rate to reduce the amount of spending, and the demand.
Let’s say the RBA didn’t put up the interest rates, what would happen?
We would have shortages of all the supplies we want! (Imagine having a shortage of pizza shapes?! I know there are bigger issues, but that would make me sad).
So, the hope is once everything stabilizes, and they can get the interest back down to 2-3% where it should be (the current inflation rate is up at 8-9%), interest rates will come down, and we will return to some normality. This is a HOPE I have. Currently, the RBA can’t predict what will happen down the track, although this would be the natural next step once we’re back to some form of normality.
- Property market impact
- Homeowner impact
- First Home buyer impact
- Investor impact
- Existing renters
- First time renters
- Vendor’s/Sellers impact
What does this mean for the property market?
In a nutshell:
– Homeloans are harder to obtain.
– Lenders won’t lend out as much money.
– The supply and demand are all out of whack.
– The property market enters a lull. Therefore, fewer homebuyers enter the market.
– Sellers may not achieve their asking price, with homebuyers not being lent the money they need to purchase at that particular vendor’s asking price.
When the interest rates are low – this encourages prospective buyers to enter the property market because getting a home loan tends to be more affordable/obtainable.
The opposite effect happens when the interest rates are up like they are today. When the interest rates are high, finance becomes harder to get, and homebuyers aren’t as eager to enter the market. They also can’t get as much money lent to them as they would have when the interest rates were lower.
Now, because interest rates are higher, this makes properties more expensive to buy, and the demand to purchase a home reduces.
Essentially, we are about to enter a period where the property market goes into a slump. Fewer buyers are trying to enter the marketplace, who will continue to save and hold out to buy something if the interest rate reduces. Sellers who ‘need’ to sell due to their circumstances may not see their property sell quickly or for the price they want.
What does this mean for existing homeowners?
You’re lucky for now, that you won’t cop an immediate increase on your mortgage however, when your fixed term comes to an end, you could be hit with an increase. This depends on what the market will be doing at the time.
Basically, you have the time to prepare and save for these potential increases! That way you aren’t heavily impacted with a surprise increase when the time comes!
Existing homeowners will have increased mortgage repayments. Now the media is really hamming this up.
Variable Rate homeowners:
Let’s look at an example.
Damien & Angela have a $500,000 debt for their home.
They currently have a 2.43% interest rate with monthly repayments equaling, $1,957 per month.
With the increase, their new interest rate has risen to 2.84%. Their new monthly repayment is $2,065 per month.
The difference is a $108 increase per month.
Realistically, that’s maybe your monthly spend on Uber Eats! So, if you cut out a couple of takeaway meals or tried to reduce your spending elsewhere, like all those streaming services you might have (Netflix, Binge, Stan or Tubi) you will be able to offset the increase.
I know that everyone’s situation is different and perhaps this increase is really affecting your lifestyle and situation. If that’s the case, appeal to the bank and talk to your bank’s financial hardships team. They will offer to assist you and have ways of helping you out when you’re in a tough situation. There is always some sort of answer to help you through a tough time!
Another option, you can also shop around for a better deal. My partner and I got in touch with our mortgage broker (we were looking to see if there was any benefit to fixing our mortgage rate). Turns out that the interest rates were already inflated, so the guidance we received from the broker was to have it gradually increase, rather than fixing the loan and paying a higher rate than we would have been, sooner. It suited our situation to do it that way, but get in touch with your broker and see if they can offer you some guidance for your situation!
What does this mean for first home buyers?
First home buyers are probably in for a bit of a tougher ride. However, that doesn’t mean that it’s impossible to purchase a home!
What it does mean, is that you might have to save for a little bit longer.
The interest rates increasing mean that banks are not lending money as easily as they were. This means affordability decreases for new home buyers.
Let’s look at Damien and Angela again. They want to enter the market to purchase a home for $400,000 at a 4% interest rate. However, the bank can offer a 5% interest rate meaning they can only offer them a $355,000 loan based on their qualifications. The increase of 1% has decreased their borrowing power by $45,000.
In this case, this might be a great time to engage with a mortgage broker, why?
1. It’s free advice, they are paid by the bank when you purchase.
2. They can look at your financial situation and guide you appropriately.
3. They will shop around for the best deal!
So don’t throw the towel in just yet! Interest rates, inflation and all this stuff are tricky. Talking to a broker will save you time, stress and potentially some money- or at least a plan for the future!
What does this mean for investors with investment properties?
If you’re an investor with multiple properties then it seems obvious that you’ll be hit with multiple interest rate increases across your various mortgages.
As an investor, you already have higher interest rates than First home buyers, which can add pressure to your situation when discussing interest increases.
What you could do to offset this situation is increase the rent for your properties to offset the increase. However, think about the pressure that also puts on the current renter in the property and what it means for them too.
If you have great tenants who pay their rent on time and have given you minimal issues, is it worth increasing the rent and risk them vacating the property? No one really knows. Just take time to consider the current situation for you and your tenants, and maybe discuss this with your property manager so they can guide you appropriately too!
Overall, the impact on existing investors may not be as bad as on new investors who want to enter the market. Discuss with your mortgage broker what the next steps in managing your multiple properties and the interest rate increase could be to see what guidance they can offer you for your situation.
What does this mean for existing renters?
If you’re renting right now you could cop an increase on your rent!
The landlord may not have paid off their mortgage for the property you’re renting. This means to offset their interest increase, they put up your rent so you pay the difference, instead of them.
Now, this might not happen for all renters, particularly if the home you live in is paid off by the Landlord. They won’t have a reason to increase the rent unless they’re just trying to get more $$ for their circumstances.
If you feel your rent has been increased really high, and it’s not affordable, you can challenge the rental increase through Consumer Affairs. There is a fully outlined process that you can check out here.
What does this mean for first-time renters?
Like existing renters, the increase means that right from the start when you are applying for a new rental property, you might notice that there has been an increase to the weekly rental amounts advertised than what you were seeing previously!
We know that the Victorian rental market is pure shite at the moment- there aren’t enough rentals available and there are 200 applicants on some properties. It’s crazy right now and I really feel for Aussies out there doing their best to try and find the right home at a reasonable price.
There is a rental crisis going on in this country and this might be the time to consider your locations, where you want to live and if moving further away to try and find a cheaper rental could be an option if you’re desperate.
If you’re in a position where you’re trying to find a home and are struggling, you could qualify for rental assistance with Centrelink. Check out the link below to see what options there are!
Look through realestate.com and scour for properties, there is something out there in a price range you can afford that gives you the basics you need. There are also people and communities willing to help, if you need assistance in this space, email me and I’d be happy to help you or put you in touch with some resources!
What does this mean for sellers?
This will be tough for anyone in this boat as the market starts to enter a lull.
As I’ve outlined, when the interest rates are up there are fewer buyers entering the market which means that your home might have that “for sale” sign up longer than what we’ve seen in the last 2 years.
With less lending, this means that although your home might be valued at $500,000, it doesn’t mean that it can sell for that amount if the banks aren’t lending as much to buyers. If they can only afford your home at $450,000, expect to see offers coming in lower than you might want.
There are a few things to consider if you’re selling your home:
1. Is it the right time to sell?
2. Gearing up for your property to be on the market longer than 30 days. If your property is on the market for a long time with no traction, you could risk spending more advertising dollars with the agent and not getting the traction you need/want.
3. Can you afford to sell your home, and purchase a new one with the interest rates being where they are?
Talking to a reputable and trusted real estate agent in your local area can help, as also talking to a mortgage broker/financial planner. These people can guide you on what’s happening in the marketplace. Although, be mindful with agents that they do want to sell your home and will promise you your asking price. So do your research and make sure that you’re not pointlessly selling your home, paying all this money on advertising just to take it off the market and wait until the market is in a better condition.
Overall, the interest rate increases will have impacts on all parts of the market. This is a time to sit down and look at your finances and consider talking to a financial advisor, broker or even your local, trusted agent. That way you can come up with a plan.
The increase won’t last forever- remember that interest rates are still lower than they were previously! In 2006, interest rates were up around 6.41%, 1996 – 7.81% & in 1986- 10.19%.
Keep up with the latest news from the RBA, getting your news from a trusted source like this one or the government bodies, that way you’re hearing the ACTUAL FACTS and not the fear that the media tends to lean into!
There are so many resources out there if you’re feeling stressed, anxious and like it’s never going to get better. Just look at the facts and reality of your personal situation, and seek advice from your bank, broker, real estate agent or other industry professionals. There are always options to help you through these changes!