Four Rate Rises This Year. Where That Leaves Buyers and Owners

The RBA is trying to bring inflation back under control.

It said inflation remains elevated and some of the risks it identified earlier in the year are now showing up. Energy prices have risen, businesses are still facing cost pressures and recent inflation results were stronger than expected.

Higher interest rates are one of the main tools the RBA has to slow spending. When mortgages cost more, households have less money available for other things.

That puts pressure on spending, which then reduces some of the demand pushing prices higher.

The problem for property buyers is that the same policy also makes borrowing more expensive.

What another 0.25% means on a mortgage

A quarter of a percentage point does not sound like much.

On a $600,000 loan, it can mean roughly another $90 to $100 a month in repayments, depending on the loan term and the interest rate you are starting from.

That is more than $1,000 a year. And that is on top of the increases that have already happened.

The exact increase will depend on your lender, loan balance, repayment structure and remaining loan term.

For an investor, that extra cost comes straight out of the property’s cash flow. For an owner occupier, it comes out of the household budget.

Buyers have less borrowing power

This is where higher rates really change the buying process.

The amount a bank will lend you is based on your ability to repay the loan, not just the value of the property you want to buy.

When repayments rise, your borrowing capacity falls.

Someone who could comfortably qualify for a particular loan when rates were lower may not qualify for the same amount now.

That means some buyers have to reduce their budget, increase their deposit or wait until their financial position improves.

It also means buyers should not shop based on the maximum number a lender says they can borrow.

The important number is the amount they can comfortably carry after allowing for repayments, rates, insurance, maintenance and their normal living costs.

Existing owners need to look at their cash flow

If you already own property, the question is different. You are not deciding whether you can borrow for the first time. You are working out whether the property still works with higher holding costs.

If the mortgage repayment rises while the rent stays the same, the gap between rental income and expenses gets wider.

An investor who was already contributing money towards the property each month will now have to contribute more.

Investors need to run the numbers again. I would go back through every investment property and update the figures.

• Look at the current loan balance.
• Look at the actual interest rate.
• Look at the current rent.

Then include rates, insurance, property management, maintenance and any other regular costs.

Work out how much the property is costing you each month after rent. Do not use the numbers from when you first bought it.

The mortgage has changed. The rent may have changed. Insurance and other costs have changed too. You need to know what the property is doing today.

Higher rates do not automatically mean falling property prices

It is tempting to look at four rate rises and assume property prices must fall. It does not work that simply.

Higher rates reduce borrowing capacity and put pressure on demand. But property prices are also affected by housing supply, population growth, employment, construction and the number of people trying to buy in each area.

The RBA itself noted after its September decision that housing prices had fallen in most capital cities and new housing loans had declined noticeably.

That tells us higher rates are already affecting housing activity. It does not tell us exactly what every property will be worth next year.

Sellers may have to adjust their expectations

Higher borrowing costs affect sellers as well.

If buyers can borrow less, they cannot pay the same prices they could when their borrowing capacity was higher.

That puts more pressure on properties that were already being priced aggressively.

It does not affect every property equally. A good house in a location with strong demand can still attract buyers.

A property with obvious problems, high ongoing costs or limited demand has less room to hide when buyers become more careful about what they spend.

What I would do if I were buying

I would get my finance sorted before spending too much time looking at properties.

Know what the bank will lend you, but also work out what repayment you are comfortable with. Then leave some room in the budget.

You do not want to buy at the absolute limit of what the bank will approve and have no room left when rates, insurance or other costs increase.

I would also compare the actual repayments at today’s rate rather than building a buying decision around the hope that rates will come down later.

If rates fall in the future, that is a bonus. It should not be the reason the purchase works.

What I would focus on

For buyers, I would focus on buying a property that works within the borrowing capacity and cash flow available today.

For investors, I would look closely at rental income and the amount of money required to hold the property each month.

And for existing owners, I would review the mortgage rather than simply accepting the new repayment.

Check what rate you are paying. Compare it with other available loans. Ask your lender whether there is a better rate available.

A small difference in the interest rate can make a big difference over a large loan.

Final word

Four rate rises in one year have changed the numbers for anyone borrowing money.

Buyers have less borrowing power. Existing owners are paying more. Investors are facing higher holding costs. That should not stop you from buying property.

It means the numbers need to work at 4.60% and at the mortgage rate you will actually pay.

Do not build your purchase around the assumption that rates will fall soon. Buy what you can afford, keep some room in the budget and make sure the property itself makes sense.