How Rising Home Loan Rates Affect Buying Power
If you are entering into the property market you are probably familiar with ‘buying power calculators’ which determine how much you can borrow based on your income and expenses. These tools are great and work based on the value of the loan and the principle of interest. To summarise, according to your income, you will be able to afford home loan repayments of a certain value; payments that include interest which is what incentivises the bank to provide the loan. The Reserve Bank has recently increased home loan rates which has had a noticeable impact on buyer confidence in the property market. In this blog post we discuss the impact of rising home loan rates and how they affect buying power.
RBA Interest Rate Hikes 2022
In May, 2022, interest rates rose by 25 base points. This increase was the first the Reserve Bank implemented in ten years. The increase doubled in June: by 50 points. In July, interest rates rose by another 50 base points, taking the national base interest rate to 1.35%. It’s expected that interest rates will rise again by 50 points in August. These interest rates are often passed on by banks to consumers, which means a loan with an initial interest rate of 2.79% (the national average) could rise to 3.29% next month. Another 50 base point interest hike would result in additional monthly payments of $270 on a home loan of $1 million.
How Much Can I Borrow?
The interest rates set by banks are determined by both the capital a buyer has to invest in their home (or investment) as well as their ability to make regular repayments with their income. When the Reserve Bank increases interest rates, the potential to get a higher-value loan decreases as total repayments increase. As housing prices increase, additional increases in base interest rates by the Reserve Bank result in a decline in consumer buying power.
How Should I React?
There’s never been a more important time to consider your home loan situation. Start comparing options and make sure that the loan you choose offers the best value. Your home loan repayments will have undoubtedly increased this year, so be prepared to do some research to ensure you’re getting the best deal. The same goes for people entering the property market for the first time: shop around and compare options during this tumultuous time and consider employing the services of a financial advisor like Pillar Financial who can do most of the legwork for you.
Contact Pillar Financial
Call our friendly team on 1300 730 309 or reach out via our contact page to ask what we can do for you as you begin your journey towards home ownership.