By Tina Howes, Mortgage & Finance Advisor – SmartMove
Possibly the most asked question I am getting at the moment is about interest rates and property prices.
Interest rates and the threat of rate rises is all over the news, social media, and radio. You simply can’t avoid the topic at the moment.
Are rates rising and should this stop you from investing? That together with the threat of dropping property prices is creating some uncertainty.
After the last couple of years of crazy property growth and rising prices, we are now starting to see the market change in some locations.
The rate of growth in property prices is slowing in Sydney and Melbourne but continuing to rise in Brisbane and Adelaide.
Some markets are deemed to have reached the peak and fixed interest rates are on the rise, whilst variable rates are lower than ever.
The RBA haven’t increased rates yet, but we are still seeing fixed rates rise. This is because, in wholesale funding markets, where lenders raise money, the cost to buy a longer parcel of money (say two, three, four and five years) has increased.
Simply put the market is factoring in money becoming more expensive as the years go by.
If the media reporting of these topics is scaring you and deterring you from investing, then my response is as follows:
- Property isn’t a short-term investment. Property is a long-term hold. I usually say five to 10 years minimum to recoup your buying costs and your selling costs. A longer viewpoint, therefore, means it’s less relevant if you pick the absolute top of the market or the bottom. If you are looking to buy and hold for a shorter period, then perhaps you could consider saving more money to have a larger deposit and be in a position to buy something that can suit your needs for a longer period.
- When deciding on buying property you shouldn’t be doing your numbers only on the current interest rates. With the cash rate at an all-time low we simply can’t expect it to stay at that level. Especially as we see countries around the world increase their cash rates, the cost for the banks to purchase money in the global market will go up. So, even if the RBA doesn’t increase rates, we will start to see bank funding costs rise and this will be passed on to the consumer.
- When assessing your loan your lender is adding an interest rate buffer of at least 2.5 per cent on top of the current rate – so you should also. If your banker or broker isn’t giving you repayments at a higher level also ask them to calculate the repayments. Make sure you can afford your loan in the event that rates rise.
- All of this requires having a good grasp on your expenses. What is discretionary and what are essential? What are the items in your budget that can be removed or reduced when rates go up? If there is very little discretionary spending in your budget and little room to move when rates rise, then consider reducing how much you borrow and buy something more affordable.
- With the heat out of the property market in some states, you can afford to wait, and save a little more.
- If you are renting, and rates rise, it will take some time, but there will be pressure on landlords to raise rental prices. While mortgage payments will likely be higher in the future, it’s important to put this into perspective and compare this to potentially higher rents, given the current undersupply rental properties.
- The fundamentals of why you should buy property have not changed. If you have a stable income, employment, have a good size deposit, can afford a loan, and you wish to buy a property, then it’s as good a time as any to buy.
Full disclosure, I’m not an economist, merely a mortgage broker with 19 years lending experience and have seen a few things in my time including the GFC, its recovery, the pandemic and emergency interest rate environment, and now the pandemic global recovery, inflationary concerns, and the latest petrol prices.
Disclaimer: This article contains information that is general in nature. It does not consider the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. This article is not to be used in place of professional advice, whether in business, health or financial.
