Fear in Homebuyers’ Hearts as Interest Rates Rise
With the cash rate at 2.6%, many homebuyers are wondering how they can survive in the new world.
Mortgage rates have climbed to at least 4.33% from 2.3% earlier in the year, and are expected to continue to climb as the RBA battles inflation.
“I think the RBA will probably raise rates by 0.25% in November and then give us a reprieve over Christmas,” said Angela Jackson, chief economist at Impact Economics.
“Then they will get the readings on the December and January data and decide their next move,” Dr. Jackson said.
The banks themselves are feeling bold, with the big four expecting to see the cash rate between 3.1% and 3.6% in 2023, before starting to fall again.
It paints a bleak picture for some who have bought into the boom in recent years and hoped that RBA Governor Philip Lowe’s prediction of not raising rates until 2024 would come true.
Not only could these people face monthly mortgage rate hikes of almost $1,000 by December, but they are already seeing declines in house prices that are compressing their capital.
“Already prices in Sydney are down around 7% and in Melbourne the figure is around 5%,” said Angie Zigomanis, director of real estate consultancy Quantify Strategic Insights.
There is market consensus that prices could fall by at least 10%, Zigomanis said.
Try a fixed rate loan?
Once upon a time if you thought rates would go up, you could opt for a fixed rate loan to get some breathing room.
But Steve Mickenbecker, Canstar’s chief commentator, says it’s not an attractive move now.
“Fixed rate loans can be up to 2 percentage points higher than variable rates at the moment, so one would have to think that rates were going to rise significantly and quickly to justify the fixed rate,” Mickenbecker said.
What should mortgagors in difficulty do?
“Go to a mortgage comparison site and find the cheapest rates,” said Robert Goudie, director of Consortium Private Wealth.
“If it’s a cheaper rate than what you have, then go to the bank and negotiate,” Mr Goudie said.
If you’ve had a home loan for a while, you might be pleasantly surprised at the deal you can get.
Mr Mickenbecker says some people are sitting on packaged loans offered by big banks five or more years ago that have interest rates as high as 5.7%, 1.37 percentage points above the average variable loan today.
These deals should be easily renegotiated, but if you’re on a deal slightly higher than 4.33%, it may be harder to get a good deal.
“If your bank isn’t playing along, then refinance, because there are a whole range of banks and brokers who are happy to take on your business,” Goudie said.
It used to be that refinancing was a tough proposition because the high fees on taking out new loans made it unattractive. However, eager lenders have found ways around this.
“Lenders will actually give you cash back to refinance,” Goudie said.
This cash back can be up to $3,000 per transaction and can offset other fees for establishing the loan.
“So refinancing isn’t as scary as it used to be,” Goudie said.
“These cash back can actually leave you with some money to pay off your debt.”
If you’re really concerned about repayments, you may be able to get a longer-term refinance, but remember that this means you pay more interest over time.
“It has you in the bank’s pocket longer,” Mr Goudie said.
Also opting for an interest-only loan so that you pay interest and not principal should be a last resort, as interest-only loans currently average 5.6%.
“They’re fine for investors, but for home loans, you wake up in five years and you still owe the debt,” Mickenbecker said.
If you’re going interest-only, keep an eye on things and switch back to principal and interest as soon as you can afford it to make sure you don’t end up with big debt later in life.
If you’re having trouble paying off your mortgage as rates rise, the old norm of setting a budget and sticking to it is an important action, Goudie says.
“Break your budget down into your payroll cycle, figure out what your ongoing costs are, and set them aside weekly or fortnightly. Calculate your fixed costs like insurance, fares and general living expenses, and set them aside fortnightly,” Goudie said.
Worst-case scenarios of falling house prices are unlikely to materialize, Dr Jackson said.
“We’ll see a bit more easing, but interest rates aren’t at a point where we’re going to see widespread distress and people selling at a loss,” she said.