How will borrowers with large mortgages fare once rates rise?


The Reserve Bank says it still has no plans to increase the cash rate until 2024, but new research suggests many Australians believe lender interest rates will rise much sooner. With that in mind, one expert says now might be a perfect time for borrowers to reduce their mortgage debt, when interest rates are low.




How will those who have taken on large mortgages at historically low rates handle once rates inevitably rise? Image source: Photographee.eu, Shutterstock.com.




The Reserve Bank of Australia (RBA) has decided to leave the official treasury rate hanging at an all-time low of 0.10% today, helping to keep mortgage rates low. RBA Governor Philip Lowe reiterated today that the central bank has no plans to raise the cash rate until inflation and wage growth figures improve not – probably in 2024 “at the earliest”.




But a new study from Canstar ^ shows that 40% of Australian adults surveyed believe interest rates on home loans will rise by the end of 2022.




The top three reasons for anticipating a hike in interest rates were forecasts that the Australian economy will recover by then (42% of respondents), inflation will rise (39%) and growth in house prices. should be slowed down (33%).




Another 24% of respondents believe mortgage rates will increase because the RBA has said the cash rate will increase.




Whenever rates go up, whether soon or in a few years, some regulatory and consumer groups worry about how borrowers who have taken on large mortgages at historically low rates will manage after the rates will inevitably increase.




Canstar’s money expert Effie Zahos said the best thing borrowers could do right now to protect themselves financially is to increase their ‘cushion’ by focusing on debt reduction mortgage.




“The point is that after borrowing for a house, many of us take out car loans, credit cards or buy now pay later, accumulating even more our personal debts, ”said Ms. Zahos.




“We have this period of potentially a few years up our sleeves where rates are low. If you don’t focus on reducing that mortgage debt, you really only have a small buffer to protect yourself in the event of a market downturn.




“We have seen house prices continue to rise, so there is a fear of missing out. We also have historically low mortgage interest rates, responsible lending changes are on the horizon and banks continue to reduce their service cushions, ”Ms. Zahos said of the current environment for borrowers. .




When a customer applies for a home loan, banks use the service rate as a kind of “stress test” to determine whether the person could afford the repayments on the amount borrowed if the interest rate rises. the future. The National Australia Bank, for example, lowered its floor rate to 4.95%.




Lower service floor rates may make it easier for some borrowers to qualify for a home loan, and in some cases even borrow much more, Zahos said, at a time when people are already deep in debt.











Canstar research analysts analyzed the numbers to determine how increases in the spot rate could affect borrowing power going forward.




They established that a hypothetical owner-occupant on the current average full-time salary in Australia (around $ 89,000 according to the Australian Bureau of Statistics) would have borrowing power of around $ 604,000 at the average floor rate of the big banks, assuming they qualified for the cheapest home loan rates on our database for a 20% down payment. Our analysts also calculated that person’s borrowing authority and repayments if they did not borrow at full capacity but borrow $ 100,000 less.




They found that an increase in the spot rate of 0.25% could save people who borrowed $ 100,000 less to save $ 379 in monthly repayments, compared to what they would pay if they borrowed the maximum amount. , assuming their bank passes on the rate hike in full.




If what happened after the global financial crisis – where the cash rate was increased six times between October 2009 and May 2010 – were to happen again in three years, the monthly repayments could be $ 440 more for that borrower. average if he took out a loan. at their maximum borrowing power now, compared to if they borrowed $ 100,000 less.




Regardless of how the cash rate might move in the future, Zahos said borrowers looking for peace of mind could refinance at a better rate and consider locking in a record long-term rate.




“It’s a big myth that fixed rates aren’t always flexible. Ask your lender if you can make additional payments, and some fixed rate loans still have a Compensation account. Of course, if you plan to sell during that fixed period, it doesn’t make sense to lock yourself out due to the break fees that often apply. “




For borrowers who are torn between fixing their home loan or going for an adjustable rate, there is another option that offers a mix of the two that may be worth exploring: a fractional home loan.




Interest rates change in March




According to the latest figures, Canstar has 179 home loans at interest rates below 2% in its database. Of these, 157 are fixed and the other 22 are variable.




The lowest variable rate in our database for a $ 400,000 loan for homeowners paying principal and interest is 1.77% (1.86% comparison rate) with a 60% loan-to-value ratio (LVR), while for an LVR of 80%, the lowest variable rate is 1.99% (comparison rate of 2.05%) and the average is 3.28%.




The lowest three-year fixed rate in the database for homeowners paying principal and interest at 80% LVR is 1.75% (comparison rate 2.22%) and the average is by 2.28%.




Here is a summary of the evolution of mortgage interest rates in Canstar’s database over the past month:




  • 12 lenders reduced 30 variable rates by 0.16 percentage points on average.
  • 2 lenders increased 2 variable rates by an average of 0.04 percentage point.
  • 25 lenders reduced 186 fixed rates by 0.23 percentage points on average.
  • 13 lenders increased 67 fixed rates by 0.21 percentage points on average.








^ Survey of 980 Australians aged 18 and over. Commissioned by Canstar and produced online via Qualtrics in March / April 2021.





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