If you’re looking to get on the property ladder right now in Australia, you might be wondering if it’s even worth it. After all, there have been six interest rate rises this year since May 2022, totalling a combined 2.75%!
But all is not doom and gloom for new home buyers and if this is you it’s important to understand how changes in interest rates can affect your monthly payments and overall borrowing capacity in the first place.
How borrowing capacity is affected by the interest rate hikes
Generally speaking, higher interest rates means that banks and lenders will reduce their lending to all buyers – because of the additional cost of repayments, so this could mean you see a reduction in your borrowing power. As this is calculated by assessing whether the borrower can repay the loan at 3% higher than the interest rate, you can see how this could affect your situation. This situation is often made worse for first home buyers as lenders reduce their discounts for loans where the deposit is less than 20% and this increases the assessment even further.
Monthly repayments and what it means when the rates keep increasing
If you already have your loan sorted but keep seeing the rates increase, of course this can be worrisome. I always advise my clients to keep an eye on the rates and budget for more than their minimum repayments in advance (plus it never hurts to overpay your mortgage whenever you can anyway).
Use an Offset Account
Using an offset account is the best way to make additional repayments and save on interest. Your repayment is determined based on the interest rate at the time and the term allowed to repay the loan. By putting extra money into your offset account you reduce the interest charged on your loan and more of your repayment goes to paying off principal. You end up owning your home faster with no extra payments.
Every Repayment Pays Off Debt
Keep up with your repayments and trust your judgment in buying in the first place. Owning property is a long term investment and while your repayments may be going up you are still paying off debt and building your wealth, brick by brick.
Rising Interest Rates Control Property Prices
If you haven’t bought yet but are trying to save for it, take comfort in knowing that rising interest rates act as a brake on property prices and therefore you may be able to buy the apartment of your dreams for less than you previously thought.
Take Advantage of First Home Grants and Benefits
See my other posts on first home grants and benefits to see what you are entitled to in regard to stamp duty and/or lenders mortgage relief. This can be the difference between buying now or in a years time.
