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Balfour Homes Blog

We interrupt this broadcast… with some expected news

This week we put our 4 part series; ‘what’s all the fuss about’; on hold as the nation is hit with some inevitable news that the Reserve Bank of Australia (RBA) has raised the cash rate target.

 

In a frenzy, the media is liberally throwing around headlines causing confusion and panic this week, unnecessarily worrying buyers looking to service a loan. We don’t like to see our customers deal with any kind of stress, therefore our duty this week is to delve into the facts, look at the wider scope of the situation and offer some advice and guidance that should hopefully put your minds at ease. 

 

Firstly, what has happened?

The RBA announced it was formally raising the cash rate target to 0.35% in response to soaring inflation.

The cash rate is the rate at which the RBA charges interest on money borrowed by commercial banks in Australia. 

In short, the RBA has made it more expensive for banks to acquire funds for their variable rate mortgage products. 

When this happens, banks pass on this increase to their customers by increasing interest rates on lending by the same amount.

 

So, is this Good news or bad news?

The truth is, although increasing rates doesn’t seem like good news, it’s actually not bad news for home buyers in today’s market either.

When we look at rates historically, they are still sitting at the lowest they have been for 30 years – which is great news! The reason it seems a lot worse than it is, is because there hasn’t been an increase in over a decade. 

Naturally the media love to amplify any news, so when we look at the bigger picture, the increase is actually very minor, and truth be told, it would be ignorant to say that interest rates rising was unexpected

Regardless of the increase, for this generation of buyers it has never been more options to get into your own home; especially with government grants. – That’s pretty good news if you ask us! 

 

Putting things into perspective

Now, homeowners aren’t used to increasing rates so it’s important to shift the perspective and not get caught up in misconstrued headlines. 

Here’s an example of how increased rates could impact your wallet as a homeowner. 

We used the CommonWealth Banks loan repayment calculator to work out how a 0.25% increase in interest rate could affect a homeowner with a $500k mortgage over 30 years.

 

First we checked the results for a 4% interest rate:

 

Then we increased it to 4.25% and the results were as follows:

The difference was +$17 per week. Can you see how the media have exaggerated the latest news for a juicy headline? 

Gaining some perspective on the matter, especially indigestable digits like the example above, helps us to realise that buyers who were looking to buy before the change, can most definitely still buy after. This shift in rates may not be in the direction customers want to see, but its subtlety means there are still so many opportunities out there for our buyers. 

 

Serviceability buffer

Realising the affordability of +$17 per week is all very well, but …‘how will I afford my mortgage if rates go up again?’.

Lending money can be a risky business, therefore lenders need to ensure both the mortgage holder and themselves are covered in the event of unexpected changes; such as an upturn of interest rates.

A serviceability buffer is the safety net used to ensure borrowers are able to service their loans under a range of circumstances.

 

How it works:

Let’s say interest rates are currently at 3% for your requested loan, the bank will assess your application based on a higher interest rate, say 6% and look at if you can afford this, yes or no?

To clarify, you won’t be paying 6% interest, but if the banks can see you can afford this, then it allows movement for uncertainty if rates were to change. 

And don’t worry because If you can’t afford it, it doesn’t mean that you can’t borrow, it just means the banks will reassess how much you can borrow. 

The buffer is the banks pre-empting changes such as the recent rate increase, to make sure you will be able to afford your mortgage repayments without experiencing financial stress. 

 

Keep in mind, there are plenty of options out there for all budgets when it comes to building new; and more importantly, remember that your first home doesn’t have to be your dream home. Simply getting into the market is a huge achievement, opening more doors on the property ladder as time goes on. 

During the construction phase of your new build, your interest rates will likely be on a variable tariff, which is why we love the serviceability buffer. If things were to change during this period, you know that the banks have already done their job to make sure you aren’t going to feel financial hardship. 

 

Renters Feeling the Pinch

Unfortunately, a big pinch is going to be felt by many renters during this rise. We explained how the banks pass on the extra fees from the RBA to their consumers; similarly, landlords can, and likely will, increase their tenants rent at a comparable rate if they are serving a mortgage for the property. 

‘Wait a hot minute?! Not only am I already paying for my landlord’s mortgage, but now I have to pay more for the extra costs involved in cash rises, again, for a mortgage that is not my own…?’

Yes…it’s bonkers and it’s exactly why the rental trap is aptly named; a trap. We understand the difficulties of breaking out of renting and getting into your own home, which is why Balfour homes has you covered, whatever your circumstance. We’ve built an entire department committed to getting you mortgage ready. Give us a call and we’ll tell you about The Academy. 

 

The sooner, the better

Firms in a range of industries are now indicating that they are prepared to pass cost increases, as a result of inflation, through to consumer prices. It is becoming increasingly important to act fast on purchasing a property.

We are encouraging our customers interested in buying to act now for a number of reasons

1.Firstly, this rate rise was expected, and although initially small, it will be the first in a series of interest rate rises to come this year! The governor of the RBA, Philip Lowe said in a speech explaining the decision for the cash rate increase ‘I expect that further increases in interest rates will be necessary over the months ahead.’ So, you can either expect to be paying yet again more for your landlord’s mortgage, or higher fees for your own. Get in now whilst the rates are at their lowest.

 

2.  Secondly, when you apply for finance you can look at fixing your interest rate with your mortgage. You can only apply for finance on land that is, or will soon be, registered. So, looking at land that won’t register until next year could mean you end up paying much more. Securing finance soon, whilst the rate is still low, will enable you to find a better deal if you are choosing to fix the rate.

 

Furthermore, if you wait too long and interest rates do rise, your borrowing capacity may decrease. When applying for a loan, banks use a serviceability buffer to ensure you can afford repayments in situations such as hikes in interest rates – especially if on a variable tariff. In most cases the banks use a 3% serviceability buffer to safeguard a customer if interest rates were to rise. 

 

Lastly, our favourite reason to buy now… there’s nothing sweeter than building your own home and acquiring more and more equity when it comes to paying your weekly bills. Even if rates go up again, homeownership is an investment you’ll never regret. 

 

The Deceiving Rumours of House Prices Dropping

You might have heard stories of house prices dropping 20-30% overnight following the cash rate rise and correcting themselves. Before we get carried away, let’s explore where this is coming from, as statements like this rarely apply to the whole market.

In fact, this one is very specific. When we look at the last year of property sales, we have seen homes in Melbourne and Sydney sell for extortionate amounts as a result of cashed up investors outbidding recklessly and driving up local prices. This is where these news headlines apply; the luxury, high end properties that need to return to what they are valued at. 

Think of these types of properties as the fighter jets of the housing market. Just as quick as the jets dart around the sky, the prices of properties like this can fluctuate, taking huge dips or soaring spikes. Over time we can see how such fickle prices have to try and balance through economic changes. 

For the properties that the majority of buyers are after, in the median house price range, we find our slow and steady Boeing 747’s. These houses are in consistent demand with regular and growing supply. Just as the Boeing 747’s take off, we see the prices of these houses remain stable, constant and increasing slowly over time. 

Cash rates rising are a gust of wind blowing the jet of track, whilst the 747 barely notices and remains en route. You can’t predict the future but you can use history as a benchmark. Take a look at the graph below showing how over time median house prices have changed. 

As you can see, over time the prices have risen but also remained steadfast. 

Still have some Questions? 

We know it’s hard to wrap your head around variable rates and what it might look like for you. That’s why we have the experts in the financial field to crunch the numbers and offer personal advice for your every query. 

Is it advisable to look into fixing my rate?

Will I still be able to get the loan I need for the package I want?

What should I be doing now with my savings?

We welcome all your financial questions and encourage you to speak with our team if you are feeling unsure about anything. 

 

Key takeaways

  • The impact of this rate change is subtle for the majority of mortgage holders but as the rates haven’t risen in over a decade it seems a lot worse than it is. 
  • The good news is that interest rates are still historically low at a time where it has never been easier to have a loan approved. 
  • It’s time to get the ball rolling as rates are expected to go up again. The time old saying of ‘buy now’ has never been more appropriate. 
  • The serviceability buffer enables you to service your loan without financial stress in times of variability and ensures borrowing is still possible for all budgets
  • Speak to one of our representatives about the most recent land estates and all of the affordable home and land packages available for your budget. 
  • Keeping in mind the investment value of buying now; that the goal is to stop renting and start paying off your own equity, not your landlords. Remember, your first home doesn’t have to be your dream home… simply calling yourself a homeowner is pretty fantastic.
  • Check out the Balfour Academy for your personalised savings plan and find out the options for homeownership that you never thought you had 

 

Finally, don’t let the media panic you, get the facts, look at the perspective and give us a call. Balfour is here to look after you on your homeownership journey. 

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