The celebratory season for home loans may soon be over if fears of mortgage stress re-invade the market, following talks about the uncertain timing of interest rate hikes and rising house prices.
The Reserve Bank has already expressed its intent to convert rates back to its “normal” levels now that signs of economic stability are showing. The only question is timing, which is causing home owners to stir anxiously while they wait for bad news.
Mortgage stress is when your repayments are more than 30 per cent of your income and following the latest research by the Australian Bureau of Statistics, house prices across the country have increased 4.2 per cent in the March to June quarter. This has contributed to a sharp drop of 5.3 per cent in housing affordability in the same quarter, according to a Housing Industry Association/Commonwealth Bank report.
The average home loan in the quarter has also jumped 3.1 percent from $259,000 in March to $267,000 in June, meaning that homebuyers are becoming more and more comfortable with debt. But if interest rates begin to rise along with house prices, how will Aussies entering the property market cope?
The problem could potentially be heightened by the departure of the First Home Owners Boost, which will be scaled back after 30 September and wiped out at the end of the year.
As borrowers commit to higher loans and more expensive houses, we will need to see new housing supply to even out any unstable price jumps and interest rate climbs.
Lenders will also be competing as fiercely as ever to secure your cash, so even though the prospect of rate hikes is clear, you will find some attractive deals on the market.
So how will this affect the average borrower? If, for example, you are consider borrowing $300,000 on a standard variable home loan of 5.64 per cent p.a. for 25 years. This means that you will be paying about $1,867 per month.
If this rate was to rise by two per cent, the same loan will have a monthly repayment of $2,244 – up to $4,524 extra per year.
However, if you take the time you may find a better rate, such as the HomeStar Advantage Variable home loan, which is priced at 5.03 per cent and includes no ongoing fees or upfront cost.
Initial monthly payments would be cut to $1,759, $108 per month cheaper than the first choice, and if this rate jumped by two per cent, monthly payments of $2,126 will still save you $1,416 per year.
If the pressures of maintaining a mortgage are weighing on your household, remember that most lenders offer hardship provisions, which will give you temporary relief from interest rate payments, or help you renegotiate the terms of your loan in the event of financial strains such as a job loss.the
When interest rates gear up to soar, savvy homebuyers will be hunting the cheapest deals online to protect themselves from mortgage stress. After all, regardless of the talk and speculation, the only dollar savings you make are the ones you fight for.
Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
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