Many people are jumping for joy that the $3 iceberg lettuce is back. Unfortunately, this is where the cost stabilizing joy ends.
There are almost 2 million fixed rate loans worth more than $450 billion due for renewal in the next 16 months. Most of which were locked in when fixed rates were around 2% and could increase to a variable reversal rate as high as 6.4% by December (as estimated by the big four lenders).
Consider the following scenario - a mortgage of $850,000 at a 2% fixed rate saw lenders spending $17,000 in interest a year. Assuming a more conservative rate increase to 5.5% will then see borrowers spending a whopping $46,750 a year on the same mortgage repayment.
This is a frightening prospect considering almost a third of homeowners do not consider the risk of interest rates rising when initially budgeting for a home loan. Meaning they could already be at their limit, and rising cost pressures in other areas, such as fuel, are only adding to cashflow stress.
When there is uncertainty there is fear, and when there is fear there is opportunity, is now a good time to take advantage and buy into the market?
Maybe, not just yet. With the amount of uncertainty and undeniable fear in the market, we recommend sitting back and waiting.
ANZ bank expects house prices to fall by 14% this year, and a further 6% in 2023. If this occurs at half this rate, this downturn may save potentially $90,000 off your purchase and mortgage. Whilst you will be entering when the interest rates are at the higher level, you can more adequately assess your budget position.
The interest rate rise has shone a light on the importance of sophisticated budgeting and informed decision making prior to buying a house. Betoota Advocate second this informed decision-making advice in one of their recent articles, Bank of Mum & Dad HomeLoan Application Includes Strict Grandchildren Clause.
When it all starts feeling a bit too gloom and doom, remember that at least we do not have to pay $12 for iceberg lettuce anymore.
By Nikki Sheppard & Brett Tarlington
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