How the interest rate rise could trigger a sharp fall in house prices?

Interest rates have climbed from 0.1 per cent to 0.35 per cent — the first hike in 11 eleven years — in a move that is certain to add stress to many people’s mortgages. In a statement on Tuesday, the Reserve Bank of Australia said the board decided now was the time to begin withdrawing some of the “extraordinary monetary support” that was put in place to help the economy during the pandemic.

“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected,” the RBA said.

“There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.”

So what does a 0.35 per cent cash rate mean for your mortgage?

Experts predict the interest rate rise is the start of an upward trend.

An average owner-occupier with a 30-year loan of $300,000 on a current interest rate of 2.47 per cent per annum, will see their repayments go up by $39 per month, or $468 per year, with an interest rate increase of 0.25 per cent per annum.

• If your loan is $400,000 your repayments will go up by $52 per month, or $624 per year.
• A person with a $500,000 loan will now pay an extra $66 extra per month, or $792 per year.
• A loan of $600,000 will result in repayments going up an extra $78 per month, or $936 per year.
• For a $700,000 loan the repayment amount will be an extra $92 per month, or $1104 per year.
• Anyone with a $800,000 will need to make extra repayments of $105 per month, or $1260 per year.
• Finally, if your loan is $900,000 your repayment will go up by $117 per month, or $1404 per year.

“While this rate change may not have a big impact on the borrowing power of first home buyers, all borrowers should factor in higher repayments over the coming months and years,” Finspo chief executive Angus Gilfillan told NCA NewsWire. However, if rates do continue to rise, this will have an impact on borrowing capacity. Rate changes like these may lead to opportunities in the market, so now is a great time to speak to a home loan expert.

“At 0.35 per cent the cash rate is still historically incredibly low, but there are plenty more hikes around the corner,” she said. Money is going to start to get more expensive to borrow — and quickly. We expect most banks will pass on today’s hike to borrowers in full, however, some lenders may opt to keep some of their lowest rates on the table for new customers. Ms Tindall said people with a variable mortgage rate should find out what their bank intended to do and check it against the competition. Right now, there’s a 1.13 percentage point gap between the average existing variable rate and the lowest rate,” she said. If you can get a full percentage point off your rate now, you could protect yourself against the next four cash rate hikes.”

“It is imperative that banks do not increase their rates outside of increases in the costs of funds, because many Australians cannot afford sudden and steep rate increases. If banks see this as a green light to start hiking consumer lending rates up higher than they need to, it will backfire and create a greater problem. This rate rise, along with a property market that is beginning to cool, means some recent buyers may be caught out now – or when their fixed rate ends. If your rate has jumped or looks like it is going to, it might be time to go home loan shopping and find a better interest rate.”

There are things you can do to better manage your finances

Curtin University tax clinic founder and director Annette Morgan told NCA NewsWire people should look around at different financial institutions and compare their products on rates.

Aside from housing loans, people should also look at their personal loans, credit cards and other forms of debt that were often at higher interest rates. They could consider consolidating all their debts into one or into their housing loan if they have enough equity in their home to do so,” she said. This of course means you are paying the debts off over a longer period, but the benefit is only one payment out per month and at usually a much lower interest rate.”

Ms Morgan also recommended people look at their service providers — including electricity, gas and various insurance — to see if there were any savings to be made in changing policies or providers.

How the rate rise could trigger a sharp fall in house prices

“The first rate increase will be a line in the sand to show people this is the new economic reality, and it will be a shock for them to experience multiple interest rate rises. The RBA increased the official interest rate to 0.35 per cent at Tuesday’s meeting. It was the first increase in more than 11 years, following a sharp rise in inflation. Although the initial rate rise was relatively small, it signalled the start of a series of interest rate rises before the end of the year, SQM Research managing director Louis Christopher said.

This will put further downward pressure on house prices, which has already started to weaken, Interest rate rises spook buyers, who tend to react instantly. I think there will be a sharp drop in the number of buyers.

https://www.news.com.au/finance/business/banking/how-interest-rate-rise-will-affect-your-household-budget/news-story/1679e588a2ab8f5c18dd9b43c86275a7 & https://www.afr.com/property/residential/rate-rise-could-trigger-a-sharp-fall-in-house-prices-20220503-p5ai00