Are higher interest rates a cause for concern? This article will provide guidance on how to overcome the challenges of higher mortgage rates and decreasing property values. We will provide you with valuable tips for navigating through the potential financial difficulties that may arise.  

The topic of increasing interest rates has become a major concern for many individuals. Australians saw 10 consecutive rate rises, and only in April 2023 did we see the Reserve Bank of Australia put a hold on the cash rate. An increase of 3.60% since May 2022 translates to an additional $12,000+ per year for those with a $500,000 mortgage. However, the question remains: should rising mortgage interest rates be feared?

Home Buyers 

Conventional wisdom suggests that increasing mortgage rates lead to decreasing affordability for home buyers. For instance, if your maximum borrowing capacity at an interest rate of 4% is $400,000, if the rate increases to 5%, your borrowing capacity may reduce to $355,000. Though a 1% increase in interest rates may not seem significant, it results in a $45,000 decrease in purchasing power. As a result, you may have to search for a less expensive property or a lender offering better terms. Nevertheless, there are ways to handle rising mortgage rates and falling home prices:  

  • Conduct research and compare rates to secure the best possible deal. If you choose a fixed-rate loan, be prepared for the term’s conclusion.  
  • Be willing to compromise by looking at properties that are one or two price points below your original budget. Remember that a home is more than just size and location, other factors, such as affordability and the ability to afford lifestyle choices, may be more important.  
  • Examine your financial position by analysing your entire financial picture, including income, expenses, savings, and credit score. You may discover ways to enhance your purchasing power or reduce the burden of mortgage payments by increasing your credit score or decreasing other debts.  
  • Refrain from making unnecessary purchases on depreciating items such as cars and furniture that could further complicate your ability to afford a home. While interest rates are rising, there is no guarantee that they will continue to do so indefinitely. In the short term, purchasing power may decrease, but over time, it can increase as the economy expands and wages rise.  

Sellers 

If you are contemplating selling your current home, be aware that increasing mortgage rates will impact you in many ways. Depending on the state you reside in, higher interest rates may slow down the sale of your property, as buyers become more discerning and focus on properties with lower asking prices. As a seller there are a few measures you can take to counteract this, such as:  

  • Consulting with your mortgage broker, selling agent and finance advisor before finalising your selling strategy  
  • Renovating to enhance your property’s curb appeal  
  • Ensuring that your property is priced competitively
  • Keeping a close eye on market trends and making necessary modifications on the go

Effect on Property Value 

In an ideal scenario, a rapidly growing economy would mitigate the impact of mortgage rates on housing prices since strong job and wage gains would offset any increases in rates. Unfortunately, this is not the current situation in Australia. Consequently, the rising interest rates are reducing the borrowing capacity of buyers, thereby driving down property values.  

Buy or sell? 

Buying a house during a period of increasing mortgage rates can still be a good decision, as historically a five percent interest rate is considered low. Although rates may rise, they are not always at their peak. When housing prices are low and interest rates are high, it can be an ideal time to purchase a home and achieve homeownership.  

If you are planning to sell, be prepared for a potentially longer selling process due to rising interest rates. However, with strategic planning, thorough market research, and the guidance of a mortgage broker and selling agent, you can maximise your selling potential. Whether buying or selling, the key is to remain flexible, conduct thorough research, and stay vigilant to market trends to obtain the best possible deal. Overall, there is no need to fear rising interest rates and falling house prices if you make wise financial decisions and consider the long-term implications.  

Staying Put 

While an increase in mortgage interest rates may appear to be concerning for homebuyers and sellers, what about homeowners who are worried about increasing mortgage payments? The positive news is that there are ways to prepare for this scenario.  

Financial Security 

To prepare for potential mortgage rate increases and falling house prices, it is important to prioritise financial stability. This means securing a stable job that can comfortably cover mortgage payments and keeping an eye out for any potential layoffs in your industry. In addition, it is recommended to maintain an emergency fund for unexpected expenses like home repairs, maintenance, or short-term unemployment.  

Budget 

Regularly reviewing your budget can assist in monitoring your expenses and avoiding financial over-commitment.  

Additional repayments 

Even small additional repayments can have a significant impact on your loan overall. For instance, a $50 per month extra repayment on a $300,000 loan with a 5% interest rate could save you nearly $18,000 in interest and shorten your loan term by over two years. You do not have to make direct payments towards your loan; instead, you might be able to use an offset account to decrease your interest and shorten your loan term, depending on your circumstances.  

Look for a better deal 

Consider exploring other options if you think you are paying more than necessary in interest. Many lenders offer competitive rates, so it is advisable to consult with a broker to determine the best deal for your circumstances.  

Fixed-rate mortgage 

If you are concerned about rising interest rates and the impact they may have on your mortgage payments, one option is to consider fixing your interest rate for a specified period. This will allow you to know exactly how much you will be paying each month for the next one-to-five years, without worrying about any unexpected increases. Keep in mind that there is always some level of risk involved in taking out a home loan, as no one can predict the future. However, by managing your spending, budgeting carefully, and seeking advice from experts, there is no need to panic even if interest rates continue to rise. You might even discover that you can save money over the long term.  

What are the implications for you of rising interest rates? 

Households need not be alarmed by rising interest rates and falling house prices. Instead, there are several steps they can take to prepare. For instance, they can scrutinise their financial position and avoid spending unnecessarily on depreciable items such as cars and furniture. By adopting a proactive approach, ensuring financial stability, and exploring the best mortgage deals, households can confidently navigate through the transitional housing market and overcome rate hikes.  

Need help? 

If you need help examining your financial position or require strategic advice on how to offset rising interest rates, contact one of our brokers today.  

Please note that the information contained on this website is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.

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