So, the reserve bank has left official interest rates at record lows. That’s good news, and if you take the comments to the bank from the Reserve Bank of Australia governor Phillip Lowe, the next move will most likely be up but not for quite some time.
According to a study by Roy Morgan Research, 16.8 per cent of mortgage holders, or 666,000, can be “at risk” or already facing some degree of stress over their repayments.
But what does that mean?
It means most people spend too much money. We live in a consumer society where advertising is planted in our face in different forms every minute of the day. It manipulates the way we think and makes us feel like we need to have every new gadget or latest phone as soon as it comes out. There is a sale in every store every day of the week which makes us feel like we should get it now, even though we don’t need it. Interest free purchasing is made easy but is more expensive than you think, especially if you don’t pay it off within the specified period. Then there is keeping up with the Jones’s. You know that family? Most of us live outside of our means and spend more than we earn.
So, what will happen when interest rates rise? There’s two things that I will mention.
Real Estate – This will stall but not burst. We are not in a bubble. We are in a time where demand is outweighed by supply in most major cities. This is due to the lack of vacant land in the main suburban and city hubs, hence the massive influx of high rise development to try and cater for the need to live within a hop, skip and a jump from city life. Mums and dads have now realised considerable gains in equity and are using it to invest or renovate, sometimes pushing property prices higher because they can afford to pay more. It is not the best decision to invest in over inflated real estate but not the worst either.
Think of investing 101. Buy low, sell high.
Serviceability – From a lending perspective, investment lending has tightened its grips, but owner-occupied buyers still have the luxury of more relaxed lending policies. The serviceability rate is the rate that all lenders use and is usually about 3.5% higher than the interest rate you will get from the bank. Currently it is about 7.25% with most lenders. That means that when you approach your bank (or when you enlist your trusted Albion Park mortgage broker) and the interest rate is at 3.80%, they know that you can still meet your obligations if interest rates rise. Therefore, most people are not at risk with mortgage payments.
Investors with interest only debt that have purchased in major city areas, that have experienced above average capital growth quickly, and who are highly leveraged are more at risk. Remember investing 101? Property investing is speculating. Just like when you invest in shares, you are betting on it going up in price. The concern with people thinking that the growth will continue in these already over inflated areas, is that when property prices stall, or when interest rates start rising and they haven’t owned the property long enough to realise any equity, they will find themselves in a bit of trouble.
But this isn’t most people and as stated before Investment lending has been tightened significantly to soften the impact when interest rates rise.
The time will come, and Interest rates will start to rise. We will see some selling from interest only investors and people who don’t have much income left over at the end of the week. This is good for the market because it puts a more stable borrower into a home. Possibly at a reduced price. Win!
People will start to reassess their budgets. We all know when times are good we can get a little carried away. It might be as simple as cutting out that daily coffee. There’s $25 per week back in the pocket. If both mum and dad do it, that’s $200 per month savings to go onto the mortgage. That’s one example to save the first couple of interest rate rises. People will make their own adjustments where necessary. You will be amazed where your money goes when you seriously look at your spending habits.
Forget the doomsayers. At some point interest rates will rise and some people will be affected, but it’s not going to cause a crash. We will not repeat the USA real estate market because the cause of the GFC (Global Financial Crisis) is totally different to what we are facing here in Australia. The cause was a mixture of bad policy and greed by multiple areas of the financial sector.
With all that said, I’m putting my money of this interest rate still being here into late next year. There are too many factors to consider moving interest rates now. Let’s just say the reserve bank of Australia is stuck in between a rock and a hard place and can’t move up or down.
I hope you enjoyed the read.
Mortgage Broker KDT Finance South Coast