May 3, 2022
The March quarter inflation data left the RBA with little choice but to increase its interest rates, and though it came as no real surprise to anyone who follows the financial and property markets, this week's confirmation of a 0.25% rise was greater than expected.
It’s important to remember that the increase of 0.25% is nominal for the average borrower and that, typically, lenders factor in a 3% buffer when they approve a loan. Furthermore, thanks to the COVID lockdowns, many borrowers are as much as 45% ahead on their mortgage repayments, according to APRA.
However, with Philip Lowe warning of further increases over the next twelve months, some borrowers may need to exercise caution, especially in Sydney where the city’s median house price sits around $1,400,000 and there is a greater risk of them falling behind in their repayments. For example, for the average borrower with an interest-only mortgage of $620,000, a 2% rise would mean an increase of $1033 per month.
Despite obvious concerns, most people view this correction as a necessity. And coming as it has during an election campaign – a time when both parties are vying for votes - the rise is good news for those renters trying to save a deposit to buy - especially if property prices continue to decline as a result.
As the ABC confirmed in an article this week: “Prior to the election, homeownership for low-and-middle-income earners – without the bank of mum and dad – was little more than a pipedream, but both sides of politics are now dangling the carrot of the Great Australian Dream.”
Obviously, some young borrowers who have never experienced the high-interest rates of the nineties will be ill-prepared for such a rise. Few of them will be able to compute the mortgage stress caused by the 17.5% interest rate we experienced then. And for those buyers who have overextended themselves, the decision may leave them exposed, with limited choices: either they reduce their budget or increase their income in some way.
Well, the obvious place to start is with a budget review. By creating a simple spreadsheet that incorporates all your outgoings, you can see exactly where your budget needs tweaking and if you are living beyond your means.
A concrete understanding of your current financial situation is imperative, but if a household budget review is beyond your personal expertise, seek professional advice from a financial advisor or use the government’s Budget Planner here.
It may surprise you how easy it is to cut your costs without too much impact on your lifestyle. But be warned: You may need to ask yourself some difficult questions as well, like whether you really need that daily coffee, take-away or Uber?
And a budget review is not the only way to minimise your financial risk. Below is our guide to several easy changes you can make to put yourself in a better position:
There is no greater stress than mortgage stress and the pressure to keep a roof over your head, but there's usually a solution to every problem so try not to panic or make any impulsive financial decisions. Consider all your options carefully before you rush in and list your property to sell. We are living in unsettled times, and now, during an election campaign and on the back of the first interest rate rise in eleven years, may not be the optimum time to sell unless you must.
Whether it’s one of our experts at Lending Loop, your lender or mortgage advisor, or a friend or family member who has personal experience of your situation, there will be someone who can help you find a solution that works with your circumstances. But if you do decide to sell, make sure you check out our Seller Assist service, designed to make the process smoother for you.
And for those of you looking to buy a property now to take advantage of the predicted lower prices, check out our latest off-market listings at Listing Loop. Log in to your property hub now or download our app for our latest updates. Not yet a member? No problem because you can sign up with us today for free.
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