What’s happening with interest rates?
You may have seen a spate of recent headlines about lenders raising interest rates and changing lending criteria across a range of loan products – despite the official RBA cash rate remaining at an all-time low.
It’s no wonder a number of our clients are asking “What’s happening with interest rates?”
Sweeping changes in the finance industry are leaving both property investors and owner occupiers more than a little nervous. Any increase in interest rates naturally starts to raise fears about future mortgage stress – especially for those with very little ‘wriggle room’ in repayments.
WHY are these changes happening and what do they mean for YOU? Chances are you WILL be affected…
- Why all the changes?
You would expect record low interest rates to be great news for borrowers, but in reality lenders and regulators become nervous about how borrowers will manage their debt when interest rates rise.
Many of the recent changes are the joint result of lenders attempting to ease funding pressures combined with APRA (Australian Prudential Regulation Authority) exerting pressure on lenders to slow down lending in overheated markets in some states.
In addition, despite the fact that lenders have been put on notice NOT to pass on the costs of the 2017 budget levy to customers, the full effect of this levy is yet to be seen. The result is a world of uncertainty!
- Who will be affected?
The answer? Potentially anyone with a mortgage! For instance:
- Loan to valuation ratios (LVRs) are decreasing so larger deposits are required (FHBs and investors)
- Interest only loans are tightening for both investors and owner occupiers
- Lending criteria is tightening for investors and off the plan purchases. Take note if you entered into a contract before these changes occurred!
- Bank valuations are starting to come in lower than expected in most states…
And the list goes on.
- How do you protect yourself?
The natural level for interest rates is around 7%. This is the level usually used by lenders to determine your capacity to repay a loan so there is a natural ‘buffer’ built into repayments.
On the other hand there is a whole generation of homeowners who haven’t experienced rates at that level – the ‘actual’ prospect can be daunting.
Apart from looking for opportunities to either make savings in your current expenditure to cover higher repayments or finding ways to increase your income, other alternatives may include:
Move to a more competitive home loan. If you haven’t refinanced for a while NOW is the time to explore alternate options. In many cases we can help you with that!
Start paying more NOW! If you have the ability, consider increasing your current repayments to a higher level to become acclimatised to higher repayments. If interest rates DO increase then you are already prepared as you will have a buffer in place that may help on those unforeseen ‘rainy days’. Speak to us first before using equity to understand the consequences.
Lock in a fixed interest rate. If interest rates increase during the fixed period your rate and repayments will not rise. This may provide greater certainty for a period of time. On the other hand, if rates decrease, you are locked into your fixed rate for the loan period. You definitely need to TALK TO US to explore if this option is suitable for your circumstances.
- How can you tell if you’re at risk?
Those most at risk of future mortgage stress are those who are paying more than 30% of their pre-tax income on home loan repayments. A good start is to take our 4 step mortgage stress test.
CALL US and we’ll tell you how!