Rising interest rates weigh on borrowers | western avocado

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Homeowners who recently took out a mortgage could face additional repayments of up to $416 per month by 2024, according to recent interest rate forecasts. This figure is based on what a household that borrowed 80% to buy a property at the current median price of $551,887 in Australia would be required to repay if variable mortgage rates hit 4.7%, a realistic scenario according to the recent Westpac’s prediction of a 1.65 percent increase in the official cash rate by March 2024. But the impact of mortgage lending on household budgets is likely to be felt much sooner than that. If variable rates rise 0.5% by the end of 2022, as many economists have predicted, households in the region who bought at current prices could face paying $121 more per month if the banks, as expected, chose to pass the entire increase on to consumers. Variable mortgage rates are tied to the official exchange rate because it dictates how much banks can borrow from institutional lenders. Reserve Bank Governor Philip Lowe conceded in early February that it was “plausible” that the official exchange rate would rise this year, but many economists are using much stronger language. Economist Saul Eslake said recent inflation figures led him to forecast a 0.5% rise in official rates by the end of the year. “I did not think [rates would rise in 2022] until the recent higher than expected Q4 inflation figures, but now I do… I think the RBA will probably raise the cash rate by 15 basis points, that is. to 0.25% in August and 25 basis points to 0.5% in November,” he said. Mr Eslake said it was difficult to predict how many borrowers would be affected by changes to variable rates, with the ABS no longer publishing a breakdown of whether new mortgages were fixed or variable. “Traditionally, most Australian mortgages have been variable or floating rates, unlike the US, where almost all mortgages are fixed rates. But fixed rate mortgages have become more popular after the onset of COVID -19 when bond yields and therefore fixed rates fell more than floating rates,” Eslake said. Despite the potential for floating rates to rise, Eslake said strict lending standards requiring borrowers proving they could pay 3% above their current rate meant many homeowners were unlikely to be forced to sell.” History suggests Australians will go to great lengths to avoid defaulting on their mortgages or losing their homes. discretionary and, in extreme cases, “essential” spending, before doing so [selling]”, he added. Comparison website Canstar financial commentator Steve Mickenbeck advised holders of variable rate mortgages to make the most of the current low rate and build a financial reserve against future rises. is now when interest rates are still low,” he said. “Borrowers with the ability have the ability to anticipate the impact of rising interest rates by increasing their repayments. .. Withdrawal or offset facilities give borrowers the flexibility to access those additional funds if they go through unexpected tougher times, which can act as a buffer to deal with uncertainty,” he said. -he adds. Bad news for new borrowers According to Canstar, new borrowers would experience a decline in their borrowing power. If rates were to increase by 1.65%, a couple with a household income of $90,000 a year could suffer a reduction of $92,000 in their borrowing power, depending on what they would qualify for. an interest rate of 3.04% and 4.69%. “When the Reserve Bank raises the cash rate, you can be sure banks will also raise mortgage rates, which means higher loan repayments. For borrowers entering the housing market or negotiating, it also means that earning capacity becomes stretched, which means they are forced to borrow less,” Mickenbecker said. New buyers are reacting The prospect of future changes in mortgage rates is already weighing on the minds of new home buyers, with some buyers choosing the certainty of a fixed rate repayment.Canberra home buyers Matt Van Dyk and Bec Tuddenham, who bought a house in the suburb of Jerrabomberra, said a potential upside interest rates was a key factor in how they structured their mortgage.They chose to take out a split mortgage, with the m ajority of repayment at a fixed rate which is currently above variable rates with the main lenders. They knew fixed rates had been rising since late 2021 and wanted to lock in a low number now before rates rose further. But they also wanted to take advantage of some of the features that are usually only available with an adjustable rate mortgage. “We have a little on a variable just so we can have a clearing account and pay a little more while [interest rates are] low,” Mr. Van Dyk said. Mr Van Dyk said the experience of getting finance taught the couple to shop around and not be afraid to negotiate with lenders.


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