The Reserve Bank of Australia (RBA) raised the cash rate to 3.35%, and stated that further increases may be necessary to return inflation to target. However, it still might be a good idea to buy now, as the high-interest environment is only temporary, and you can refinance when rates go down.
Should You Buy In A Rising Interest Rate Environment?
The gradual rise in interest rates has discouraged many homebuyers because it has reduced their power. The Australian Prudential Regulation Authority’s (APRA) decision to raise the serviceability buffer for banks from 2.5% to 3% in late 2021 makes this problem even worse. The assessment rate most lenders use is now a full three points higher than the interest rate on the loan potential borrowers are seeking. For example, even if the interest rate is 4.5%, the lender will add a 3-point buffer, making the assessment rate 7.5% and greatly reducing the amount most people can borrow.
A higher interest rate means higher monthly repayments, which can reduce your savings and discretionary income. However, there are still some situations where buying in a rising-rate environment is feasible:
- You have a stable job and retain the job in a recession
- You earn a high income that can support the high-interest payments
- You’re a property investor (or looking to invest), as your loan would be tax-deductible and rents are increasing
- You’re a first-home buyer with little debt
There could be a few silver linings when buying in a high-interest-rate environment:
Fall In Property Prices
The RBA increased the cash rate to cool down the property market. Since May 2022, property prices have gone down. A price reduction means you are borrowing less, which may be better than a rate reduction. Would you rather shave almost $100,000 off the loan balance or save $500 a month?
The high interest rates have reduced the number of home loan-eligible individuals, leading to fewer people looking to buy the same property as you. With less demand, sellers may reduce their prices.
Less Buyer Risk
In a high-interest-rate environment, you are less likely to overpay for a property. You will have more time to inspect the home thoroughly during open houses, negotiate a better price, and make a more informed decision.
Why You Should Not Fear Rising Rates
Don’t be intimidated by rising interest rates. There are ways to manage your home loan and fulfil your dream of homeownership or keep the home you have:
- If you’re a mortgage holder, you can refinance to take advantage of lower rates on the market and other features that can help lower your repayments.
- You can even refinance to access equity and free up funds to pay for unexpected expenses.
- Start saving if you can, preferably in a term deposit account that offers a high rate of interest.
- Take the help of a financial adviser to see where you can reduce your monthly commitments and improve borrowing power.
- Get pre-approved for a home loan so you know what you can afford.
- You might qualify for various government schemes, grants and benefits; they usually have a property price threshold.
At Home Loan Experts, our mortgage brokers can help you navigate the rising rate environment. Contact us at 1300 889 743 or complete a free online assessment to speak to one of our experts today!