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Impact of RBA Rates on Mortgage Payments and Home Prices

RBA Rate Rise

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The Reserve Bank of Australia (RBA) recently raised cash rates in an attempt to slow inflation. As a result of these actions, home interest loans are now up, and it seems many borrowers will soon see their monthly repayments increase.

But these increased interest rates aren’t always bad for property investors and first-time home buyers, as property prices are likely to go lower.

The following information will explain precisely how interest rates affect home prices, property investment, and borrowing power.

Effects of the Cash Rate Hike

The first rate hike occurred in May 2022, and within that same month, home prices fell nearly 0.11%. Though the decline is slight, it’s a great indicator that Australian home prices will likely continue to follow this downward trend, or at least, the prices will grow much slower.

Remember that lower home prices don’t automatically signal that home ownership will be more affordable. As the home loan interest rates climb, mortgage costs increase. The situation will depend on how far home prices decrease and whether wage growth can catch up.

It is vital to note that the RBA lifted the cash rate to curb inflation to stimulate wage growth, so this should encourage sustainable growth in the entire economy.

How Higher Interest Rates Decrease Home Prices

balance your interest rate

How does all of this work? When the cash rate increase takes effect, this raises interest rates on existing home loans.

And we’ve already seen the trend starting where lenders and banks are passing these rate hikes on to their customers.

Home mortgages are a huge financial responsibility, and as the attached interest rates increase, they become less attractive for many people.

Buyers tend to get more careful and put more thought into taking out loans. After thinking more about their options, some may decide it’s best to wait.

But what’s more is that additional cash rate hikes are expected, which creates hesitation among buyers as they wait to hear about future increases.

What happens in the market is that some potential buyers can no longer afford a house due to high-interest rates. Over time, the demand and competition for homes get lower, and eventually, house prices begin to decline.

However, since rate hikes impact regions of Australia in different ways, this may mean something different for you, depending on where you live. For instance, Australia’s most expensive cities, such as Melbourne, Sydney, and Canberra, have already stagnated home price growth. However, growth is still evident in the less costly regional areas like Brisbane and Adelaide.

Reduced Borrowing Capacity

One significant side effect of increased mortgage rates is that the buying power of individuals begins to decline. This occurs because higher rates make it more expensive to service a loan.

So, what does borrowing capacity or buying power mean? It refers to the amount of the loan for which you are likely to be approved. People with higher incomes, a good credit score, and minimal debt will generally have higher borrowing capacity.

Still, lenders must thoroughly assess a potential buyer’s borrowing power to ensure they can afford to make their mortgage payments each month.

But along with your overall financial health, lenders also factor in the Australian Prudential Regulation Authority’s (APRA) minimum interest rate floor at 3.0%. This will tell the bank or lender if you can afford the monthly mortgage payments if interest rates were to rise again.

Some lenders use their own interest rate buffer that is higher than the 3.0% used by the APRA.

Auction Clearance Rates Could Drop

checking home model

As we discussed, higher mortgage rates equate to decreased buying power; this means buyers also have less money to use for bids at auctions. This may cause a drop in auction clearance rates, forcing sellers to accept lower offers for their houses.

How Low Interest Rates Impact the Housing Market

As Interest rates are lowered, it becomes cheaper to borrow money, so securing a loan is more appealing and accessible to potential home buyers. This leads some buyers to wait for favourable rates before seriously looking to buy.

This has a natural tendency to help increase the demand for homes, but as demand begins to grow, it eventually outweighs the supply of homes on the market.

This increase in demand drives home prices up, which forces people to buy quickly as properties are bought up in no time.

Interest Only (IO) Loans May Rise

Property investment can also commonly rise during times of low interest rates. When this occurs, interest-only mortgages start to become more appealing.

In IO loans, the borrower is only required to make monthly repayments on any interest that has accrued on loan, rather than paying down the loan itself. Alternatively, those with interest or principal loans make monthly payments to reduce the principal and the interest.

Interest paid on home loans by property investors is a completely deductible expense. So, when interest rates are down, and investors hold IO loans, their repayments are low, and they also get to deduct it from their taxes. This scenario gives savvy investors more money to invest in other ventures.

Want to learn more about your borrowing power or all the different home loan options? Contact us today; we’d love to chat!

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