Well team, we knew it couldn\u2019t last forever. With a second consecutive cash rate increase now under our belt (and the biggest single rise to the cash rate in 22 years) it appears that interest rates are definitely rising, with the widespread expectation that they still have a way to go. And while no one really knows what's going to happen (not even the RBA predicted this timing) most economists seem to be confident that interest rates will now be rising for a while to come, or at the very least have a ways to go yet. <\/p>\n\n\n\n
Having come from a period of \u2018all-time low\u2019 interest rates and \u2018once in a lifetime\u2019 economic conditions, we are now sailing into a financial future shrouded in uncertainty. But remember, we are sailing together, and while we know that navigating these periods of uncertainty isn't always easy, we\u2019re all in the same boat.<\/p>\n\n\n\n
That's probably more than enough references to sailing for one introduction, so let\u2019s have a chat about what this new period of increasing rates means on the mortgage side of things.<\/p>\n\n\n\n
Considering that the RBA\u2019s position until very recently was no increase to the cash rate until 2024,<\/a> it just goes to show how little anyone really knows about where things are going. And while there\u2019s sure to be lots of \u2018doom and gloom\u2019 in the media about the rate rises (and look to be fair, they definitely aren\u2019t fun) it is important to remember that they have been on the cards for a while.<\/p>\n\n\n\n If you\u2019re interested, here are some pieces we\u2019ve been reading:<\/p>\n\n\n\n Another interest rate rise expected in June: what will it mean for you?<\/a> - Canstar<\/p>\n\n\n\n How the two iron laws of Australia\u2019s property market put the squeeze on every generation<\/a> - The Guardian<\/p>\n\n\n\n RBA\u2019s most recent rate decision commentary<\/a> - Statement by Governor Philip Lowe<\/p>\n\n\n\n While again, no one can know for sure, there is talk that this forecasted period of rising rates may also trigger a decline in property values. In particular, the term \u2018negative equity\u2019 is being thrown around a fair bit, so let\u2019s have a chat about what that means.<\/p>\n\n\n\n Negative equity is when the balance of your mortgage exceeds the value of your property. This most commonly occurs during property market downturns. The size of your deposit when purchasing a property is the main buffer to help protect you (and the bank) from falling into negative equity. It\u2019s one of the reasons why banks have traditionally preferred a 20% deposit, which allows quite a bit of breathing room for changes in property market values. More recently though, they\u2019ve allowed people to purchase with less than a 5% deposit in some instances - a significant reduction in the equity buffer.<\/p>\n\n\n\n Again, while no one can predict what will happen to property prices over the coming years (remember that covid-induced market crash that was supposed to happen back in 2020?) it's important to understand the implications of falling into negative equity, particularly as interest rates begin to rise. Property cycles are all part of the process, and there\u2019s nothing wrong with house prices fluctuating, as is the case with other assets. For example, we expect the share market to rise and fall as part of its natural cycle. We\u2019re just not that<\/em> used to seeing property market downturns in Australia. If you plan on holding your property for the long-term then this sort of fluctuation is to be expected and can be weathered<\/a>, especially if it\u2019s your home - and can\u2019t put a value on a roof over your head.<\/p>\n\n\n\n However, if you\u2019re thinking of selling, up\/downsizing or refinancing in the short to mid-term, then changes in your equity position might have more of an impact on you. If prices do trend significantly downwards and your LVR exceeds 80-85%, you might find it difficult to refinance or borrow more money without having to pay Lenders Mortgage Insurance (LMI), which can be in the tens of thousands of dollars (depending on your loan amount). If you find you have to sell your property, and you move into negative equity, you could be left with residual debt after the sale.<\/p>\n\n\n\n When the market is flaming hot, like it has been during covid, it feels like equity is an extra gift post purchase. But when the market returns to normalcy, the only way to earn equity is to diligently pay your repayments, even more so when equity starts to go backwards. The other alternative is to sell and wait for the bubble to burst, and the Australian property market has traditionally been too strong for that to be a workable option. Hang in there, keep up with your repayments, pay a little extra if you can (even $10 a week can shave a year off the average loan), and know that the bank won't make a fuss if you lose a little equity in the short-term. The long-term outlook on property is far more positive. Thankfully, we've never seen this happen to anyone in our community, but if it is something you\u2019re worried about, please reach out and we can do some modelling for you.<\/p>\n\n\n\n As always, everyone\u2019s circumstances are different, and the only right way forward is the way that is right for you personally. Our advice? Have a think about your plans, goals and needs for the next 5-10 years, and get some trusted advice in setting up your mortgage accordingly.<\/p>\n\n\n\n It\u2019s really hard to answer this question definitively because a) everyone\u2019s circumstances are different and b) as we mentioned earlier, no one really knows what the future holds for rates or the market. But, we\u2019ll try our best.<\/p>\n\n\n\n If you\u2019re really worried about further rate rises and budgeting stress, then it could be a good idea to consider fixing. Though it\u2019s important to view this more as a way of giving yourself certainty and peace of mind, and not as a way of \u2018beating the banks\u2019 which is notoriously hard (or dare we say impossible) to do. It\u2019s also important to note that fixed rates are a lot higher than variable rates at the moment, so if repayment certainty is your main priority, you would take the hit now, work it into your budget and lock in consistency of repayments and a degree of certainty for the future.<\/p>\n\n\n\n There is a possibility that fixing now may save you money if rates continue to rise, though it is also possible you\u2019ll end up paying more interest than someone on a variable rate. The main takeaway here is - you can\u2019t put a price on peace of mind. Remember though: fixed rate loans have break fees, which can be substantial. So, if you have plans to sell\/refinance\/move off a fixed rate in the near future, things could get expensive, especially if rates don\u2019t rise beyond the fixed rate you take. Could it be that the banks want you to lock in a high rate now amongst all the panic? Just because a fixed rate is high today, it doesn't mean rates will rise that high in the future.<\/p>\n\n\n\n Look, it\u2019s a tough one. So as always, reach out to us if you need a sounding board.<\/p>\n\n\n\n Staying on a variable rate is cheaper now, and could possibly remain cheaper than the fixed rates that are currently on offer. However, this carries a degree of risk and, as we\u2019ve seen, rates can<\/em> rise pretty quickly. A variable rate also allows greater flexibility in terms of early repayments, interest offsetting, refinancing, and selling.<\/p>\n\n\n\n We know we say it a lot, but it\u2019s even more important now: one of the best ways to protect yourself from rising interest rates is to build up your savings in your offset account, or to get ahead on your repayments where you can. This can really help keep your interest charges down, and building a bigger buffer for the future will keep you in a better position. If you are thinking of staying on a variable rate, we recommend reviewing your loan now and ensuring you\u2019re starting from the lowest rate possible, ahead of future rises. (more on this later).<\/p>\n\n\n\n If you\u2019re considering refinancing, remember that with rate changes yet to come and unequal market changes (it's possible that not all lenders will increase their rates equally), there is a risk that you might move to a lender who is cheaper right now but whose rates might increase in the coming months\/years. Refinancing isn\u2019t free and can negatively impact your credit score if you do it too frequently, so it's really important to also consider the stability of the lender (do their rates fluctuate a lot?) and whether they are responsive to loan reviews, as well as looking for a lower interest rate. FYI, this is the kind of thing we can help with.<\/p>\n\n\n\n Having said that, there are lots of cash back offers floating around at the moment (i.e. banks offering cash incentives for people to refinance their loans) so if you are looking to move or fix, it could be a good time to explore the market and settle on a lender for the next few years while we weather the anticipated rate rises.<\/p>\n\n\n\n If all, or a portion of your loan is already fixed, chances are you\u2019ll want to stay put. It\u2019s likely that rates aren\u2019t going to be as cheap as they have been again for a while, so just continue reviewing the variable portion of your loan to help keep costs as low as possible. That said, if you anticipate a possibly rocky road ahead in terms of negative equity, or a change in your financial circumstances, then it might actually be worthwhile terminating your fixed contract now and moving on to a more flexible variable product to allow for future mobility, or to take a longer-term fixed rate, albeit at a higher cost.<\/p>\n\n\n\n You\u2019ll often hear the mortgage industry talk about the importance of loan refinancing, particularly during times of interest rate fluctuations (like right now). But, here\u2019s a little truth bomb that often gets left out of the conversation: you don\u2019t necessarily have to refinance your home loan to get a better interest rate. Boom. \ud83d\udca5<\/p>\n\n\n\n Now before everyone gets the wrong idea, we\u2019re not saying that refinancing isn't a good thing (it absolutely can be) but what we are<\/em> saying is that if you want to secure a lower interest rate, then refinancing doesn\u2019t necessarily have to be your first port of call. Sometimes (and to be completely honest, more often than not) a simple loan review can be all you need to get yourself a more competitive rate, especially if you are otherwise happy with your bank. And by loan review, we mean either you, or your mortgage broker, calling your bank and negotiating with them to lower your interest rate. We think this is such an important tool for managing the ongoing costs of a mortgage, that we do it on behalf of all our clients annually as part of our service. Take a look at some of the results here.<\/a><\/p>\n\n\n\n Thinking it\u2019s time for a refinance? We recommend asking yourself these questions first:<\/p>\n\n\n\nNegative Equity<\/h2>\n\n\n\n
What do I do now?<\/h2>\n\n\n\n
Do I fix my loan?<\/strong><\/h4>\n\n\n\n
Do I stay on a variable rate?<\/strong><\/h4>\n\n\n\n
Should I refinance?<\/strong><\/h4>\n\n\n\n
Refinance vs. loan review?<\/strong><\/h4>\n\n\n\n