Inflation is an increase in the general level of prices for goods and services in an economy over some time. Various factors, such as an increase in the money supply, a decrease in the supply of goods and services, or an increase in production costs, can cause inflation. Central banks attempt to control inflation and stabilise prices by setting interest rates and using other monetary policy tools. In Australia, the Reserve Bank of Australia (RBA) is responsible for setting the official cash rate, which determines how much it costs banks and other lenders to borrow money. When the cash rate goes up, banks tend to pass on this increased cost to their customers – often in the form of increases to interest rates on mortgages. The RBA sets the cash rate to achieve its target for inflation. If the RBA determines that inflation is too high, it may raise the cash rate to make it more expensive to borrow money, reducing demand and inflation. On the other hand, if the RBA determines that inflation is too low, it may lower the cash rate in an effort to increase demand.
Inflation in Australia is at 6.9 per cent over the year to October 2022, well above the RBA’s target of 2-3%. A further increase in inflation is expected over the months ahead, with it forecast to peak at around 8 per cent over the year to the December quarter. (2022 RBA Data)

How Inflation Impacts Housing Prices And Borrowing Power

Inflation can affect home loans and borrowing power in a few ways. If inflation is high and the central bank raises interest rates to bring it back down to its target level, the cost of borrowing money to buy a house may also increase. This can make it more expensive for people to take out mortgages, which can lead to a decrease in demand for property. Since rising interest rates increase the cost of borrowing money, they also reduce borrowing power. High inflation levels can also lead to an increase in the general prices of goods and services, which can reduce purchasing power by limiting the amount of money consumers have available. Inflation can also impact borrowing power by affecting creditworthiness. If the value of assets or income decreases due to inflation and reduced demand, it may be more difficult for borrowers to secure loans or other forms of credit. Overall, it’s important to consider carefully the potential impact of inflation on borrowing power when deciding whether or not to take out a loan.

Financial Hardship Due To Interest Rate Rises

If you are under financial stress and are having difficulty making your mortgage repayments, there are several ways you can address the issue. These are some options Home Loan Experts can help you with
  • Refinancing to a lower interest rate or interest-only repayments
  • Releasing equity to give you cash if your income may be affected
  • Debt consolidation to make repayments manageable
  • Switching your fixed-rate or variable-rate home loan package
  • Accessing available redraw funds
Call us today on 1300 889 743 or complete our free online assessment form to speak to an expert who can help you figure out the best option for your situation.

What Can You Do To Prepare?

There are a few things you can do to prepare for high home loan interest rates due to inflation:

Save For A Larger Deposit

A large deposit can help you secure a lower interest rate and reduce the overall cost of your loan. In Australia, lenders generally require a down payment of at least 5% of the purchase price of the home to approve a home loan. Making a larger deposit can have several benefits, such as helping you secure a lower interest rate and reducing the overall cost of your loan. This is because lenders view borrowers with a larger deposit as less risky and are, therefore, more likely to offer better terms. Additionally, a larger down payment can help you avoid paying Lenders’ Mortgage Insurance (LMI), which lenders typically require if you deposit less than 20% of the purchase price of the home. LMI can add several thousand dollars to the overall cost of your loan, so avoiding it can help make your home more affordable.

Improve Your Credit Score

A higher credit score may make you eligible for a lower interest rate on your home loan. There are several things you can do to improve your credit score in Australia
  • Pay your bills on time: Late payments can have a negative impact on your credit score. Pay all your bills, including your credit card and loan payments, on time.
  • Reduce debt: High debt levels can negatively impact your credit score. Try to pay down your debts as much as possible, and avoid taking on new debts if possible.
  • Check your credit report for errors: It’s important to check your credit report for mistakes or inaccuracies regularly. If you find any, dispute them with the credit bureau as soon as possible.
  • Use credit responsibly: It’s essential to use credit responsibly to improve your credit score. This means limiting your use of credit cards and personal loans and not maxing out your credit limits or borrowing more than you can afford to pay back.
  • Don’t over-borrow: It’s important to borrow only what you can afford to pay back, even if that means making compromises on the size or location of the home you purchase.

Shop Around For The Best Rate

If you are looking for the best interest rate for your mortgage, there are a few things you can do to increase your chances of finding a good deal. First, it’s important to shop around and compare rates from multiple lenders. You can use an online mortgage comparison tool or speak with a mortgage broker to help you find the best rates. You should also look for deals and promotions. In addition to traditional banks and mortgage lenders, you may want to consider alternative lenders, as these can often offer competitive rates. When negotiating the terms of your mortgage, don’t be afraid to try to get a better rate, especially if you have a good credit score and a strong financial profile. Finally, consider the type of mortgage you choose, as this can also affect the interest rate you pay. Fixed-rate mortgages offer more stability and predictability in your monthly payments but if rates are expected to rise, they will cost more.

Cut expenses

Budgeting is a simple way to track spending and set reasonable expectations for how much you’ll spend on living expenses. Make a budget that outlines your income and all of your expenses, including fixed expenses like rent and bills, as well as variable costs like groceries and entertainment. This can help you identify areas where you may be able to cut back. Once you start using a budget, you will identify what things you’re spending on unnecessarily. You should also review your bank and credit-card statements and see what regular expenses you can reduce or cut altogether. This will help save considerable sums of money that you can use for rising mortgage repayments or emergencies.

Secure Income

There are some ways to secure your income, depending on your goals and circumstances. One option is to get a job that can provide a stable source of income and help you build your career. Another option is to start your own business, which can be a risky but potentially rewarding way to generate income. You could also consider investing in stocks, real estate, or a small business, which can generate income through dividends, rent or profits. In addition, building up your savings and budgeting your money carefully can help secure your income by giving you a financial cushion to fall back on in case of unexpected expenses or income loss. A financial adviser can help you determine the best strategy for securing your income.

Additional Income

Making a little extra money each month will help you greatly. Any extra income can help you save and prepare for higher rates when inflation is raging throughout the economy. Here’s what you can consider
  • Take on a part-time job or freelance work: If you have some free time, you may generate extra income by taking on a part-time job or freelance work. This can be a good way to bring in some extra cash without committing to a full-time job.
  • Rent out a room: If you have a spare bedroom or guest house, you may generate extra income by renting it out to travellers or other people needing temporary housing.
  • Sell items you no longer need: Go through your home and look for items you no longer use or need. You may be able to sell these items online or at a garage sale to generate extra cash.
  • Rent out your car: If you have a car that you don’t use all the time, you may be able to generate extra income by renting it out through a car-sharing service.
  • Invest in a side hustle: Consider starting a small business or finding other ways to monetise a hobby or skill. This can be a good way to generate extra income over the long term.
  • Get a raise or negotiate higher pay: If you are working a full-time job, you may be able to generate extra income by negotiating a higher salary or asking for a raise. This can be a good option if you are already working as much as possible and are looking for ways to increase your income.

Is It A Good Idea To Get A Home Loan When The Inflation Rate Is High?

Whether or not it is a good idea to get a home loan when inflation is high depends on several factors and will vary from person to person. But there may be some ways you can benefit from buying in a high-interest-rate market.
  • Look for undervalued properties: Some properties may be less attractive to buyers and, therefore, more affordable. By carefully researching the market and looking for undervalued properties, you may find a good deal even if interest rates are high.
  • Consider the long-term outlook: If you believe that property values will increase over the long term, you may be able to benefit from buying now, especially once inflation has taken its toll on prices If you can afford to buy while the market struggles, the long-term pay off can be huge.
  • Negotiate terms: If you decide to buy when rates are high, you may be able to negotiate more favourable terms with the seller. For example, you may be able to get a lower price or a longer closing period to make the purchase more affordable.
  • Keep an eye on interest rates: Finally, it’s important to keep an eye on interest rates and be ready to act if they start to decline. If you can lock in a lower interest rate after buying in a high-interest-rate market, you may be able to reduce the overall cost of borrowing and improve your financial situation.

Use our borrowing power calculator to determine how much you can borrow according to the current interest rates in the market. You can also explore cashback offers from lenders in our panel.

Disclaimer: The ‘How much can I borrow?’ calculator takes your income and expenditure and provides an accurate indication of how much you can afford to borrow.It combines the exact method used by the serviceability calculators of three banks to find out whether you’d be eligible for a home loan.

Talk To An Expert

It’s important to consider the pros and cons of buying property in a high-interest-rate market and to take a long-term perspective when making a decision. Call us on 1300 889 743 or enquire for free online today, and we’ll assist you with any help you require with purchasing your dream home.