Expected interest rate rises later this year mean more costs for mortgagees and lower borrowing capacities, so experts say now is the time to act.
Homebuyers should “batten down the hatches”, experts warn, ahead of sooner than forecast interest rate hikes.
The Reserve Bank of Australia is expected to maintain the cash rate at a historic low of 0.10 per cent when it holds its first monthly meeting of the year on Tuesday, but economists are already “pricing in” increases as inflation rises.
The central bank has repeatedly insisted it won’t lift the rate until 2024, or 2023 at the earliest, but Westpac recently dramatically brought forward its expectation a hike will come after the RBA’s August 2 meeting.
The bank’s chief economist Bill Evans has predicted an initial 15 basis point rise followed by a further hike of 25 basis points in October – bringing the cash rate to 0.5 per cent.
If Westpac’s forecast comes about, banks would respond by lifting the average variable rate to 3.43 per cent, Canstar says.
RateCity calculated a borrower owing $500,000 with 25 years remaining on their loan would accordingly be paying $103 extra per month by October.
Westpac also predicts the RBA will have hiked the cash rate by a total of 1.65 per cent by March 2024, bringing it to 1.75 per cent.
By that time, the same borrower could be paying $428 more a month than they currently are, RateCity says.
The comparison website’s research director Sally Tindall said homebuyers should prepare for higher costs, and if need be, batten down the hatches.
“While the exact timing of the next cash rate hike is still not certain, borrowers need to know that rates are on the rise – it’s just a matter of when,” she said.
“Recent APRA data shows the average borrower is currently 45 months ahead on their repayments, however, that doesn’t mean every borrower will be able to take these rate hikes in their stride.
“One way you can prepare for future hikes is to get ahead on your repayments now while rates are still low.
“The lower your loan size when rates do rise, the less pain you’ll feel.”
She said borrowers on variable rates should also check what rate they’re on now and potentially switch to a more competitive lender or at least ask their bank for a discount.
“RBA data shows the average existing variable rate customer is on a rate of 2.98 per cent, while the average new customer is on a variable rate of 2.59 per cent – that’s a 0.39 per cent difference worth haggling for,” Ms Tindall said.
“If you do manage to move on to a lower rate, consider putting any savings back into your loan, which will also help minimise the impact of future rate rises.”
RateCity says rising interest rates will significantly decrease how much banks will let people borrow, likely putting a handbrake on property prices as buyers won’t be able to bid as high as they may have planned.
It estimates that if variable rates rise by 0.40 per cent by October, a single person earning $100,000 would have their current borrowing capacity of $751,000 reduced by $31,900 to $719,100.
This assumes they have a 20 per cent deposit and are taking out a 30-year loan on the current RBA new customer rate of 2.59 per cent, RateCity says.
Originally published as Homebuyers warned to ‘batten down hatches’ ahead of sooner than expected interest rate hikes
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