SHOULD YOU BUY WHEN INTEREST RATES ARE HIGH?

ship or keep the home you have:

THE Reserve Bank of Australia (RBA) has raised the cash rate significantly since May 2022 and stated that further increases may be necessary to return inflation to target. However, it still might be a good idea to buy now.

The gradual rise in interest rates has discouraged many homebuyers because it has reduced their power. The Australian Prudential Regulation Authority’s (APRA) decision to raise the serviceability buffer for banks from 2.5% to 3% in late 2021 makes this problem even worse. For example, even if the interest rate is 5%, the lender will add a 3-point buffer, making the assessment rate 8% and greatly reducing the amount most people can borrow.

A higher interest rate means higher monthly repayments, which can reduce your savings and discretionary income. However, there are still some situations where buying in a rising-rate environment is feasible:

You have a stable job that is recession proof

You earn a high income that can support the high interest payments

You’re a property investor (or looking to invest), as your loan would be tax-deductible, and rents are increasing

You’re a first-home buyer with little debt

There could be a few silver linings when buying in a high-interest-rate environment:

FALL IN PROPERTY PRICES

The RBA increased the cash rate to cool down the property market. Since May 2022, property prices have gone down. A price reduction means you are borrowing less, which may be better than a rate reduction. For example:

1. Purchase price $750,000k @ 2.5% = $2963 p/m*

2. Purchase price $650k @ 5% = $3489 p/m*

* Principal & Interest Repayments

LESS BUYER RISK

Would you rather shave $100,000 off the loan balance or save $526 a month in repayments? Reduction in sale prices differ in each location so make sure to do your research.

LOWER COMPETITION

The high interest rates have reduced the number of home loan-eligible individuals, leading to fewer people looking to buy the same property as you. With less demand, sellers may reduce their prices.

In a high-interest-rate environment, you are less likely to overpay for a property. You will have more time to inspect the home thoroughly during open houses, negotiate a better price, and make a more informed decision.

Why You Should Not

FEAR RISING RATES

Don’t be intimidated by rising interest rates. There are ways to manage your home loan and fulfil your dream of homeowner-

If you’re a mortgage holder, you can refinance to take advantage of lower rates on the market, and potentially consolidate debt to help lower your repayments.

Start saving if you can, preferably in a term deposit account that offers a high rate of interest.

Take the help of a financial adviser to see where you can reduce your monthly commitments and improve borrowing power. Get pre-approved for a home loan so you know what you can afford. You might qualify for various government schemes, grants, and benefits; they usually have a property price threshold.

If you’re considering buying a property speak to your local mortgage broker to discuss your options.