Introduction

It’s hard to imagine taking out a home loan with an interest rate of 17% per annum or higher, yet that was the reality for homebuyers in the late 1980s and early 1990s. And back then it would have been just as hard to imagine home loan interest rates of less than 3% p.a.

The point is, ultra-low interest rates are not the norm, and while it might be tempting to load up on debt when interest rates are very low, it’s important to understand what can happen to loan affordability when interest rates rise.

Introduction

Just over four years ago Sarah bought an investment property. To help pay for it she took out a $........., 25-year mortgage that offered interest-only (IO) repayments for the first five years. At an interest rate of x% per annum those initial repayments amounted to $...... per month.

The benefit of IO was that it offered lower monthly loan repayments for five years, putting less strain on Sarah’s budget. However, with the IO period set to expire and the loan about to convert to principal and interest (P&I), Sarah now faces a significant jump in her monthly repayments. With 20 years remaining on the loan and at a steady x% interest she now needs to repay $,,,,,, per month, an increase of $..........

Sarah was well aware that this increase was coming, of course, and the higher payments were factored into her budget. Using an IO loan to kick off this investment worked out very well for Sarah.

Unfortunately, the same can’t be said for property investors who used the lower initial repayments on IO loans to borrow more money to buy more property, often at high loan-to-valuation ratios (LVR). After all, property was booming. What could possibly go wrong?

Introduction

The Reserve Bank of Australia (RBA) and the major trading banks may play the most visible role in setting interest rates, but in many cases they are being reactive rather than proactive.

A wide range of external factors feed into their decision-making process, including in no small part, our collective behaviour as investors and savers, borrowers and consumers. Then there’s the rate of inflation and wages growth, foreign currency exchange, the economic health of our trading partners, and the interest rates paid by local banks to borrow money from overseas.

Suddenly it’s not so easy to figure out where interest rates are headed, even in the short term.

Introduction

It goes without saying that homebuyers love low interest rates. The lower the interest rate the less the mortgage repayments on a particular house, right?

Well, maybe.

Lower interest rates also mean borrowers can service a bigger loan. In a competitive housing market that can push up prices, as we have witnessed this past decade.

So what’s really going on? Have low interest rates been good or bad for homebuyers?

The numbers crunched...

Introduction

Although the Board of the Reserve Bank of Australia has a full agenda at its monthly meetings, the one item most economists and mortgage-holders eagerly anticipate is the cash rate decision. Up, down or what's been the norm over recent times, steady?

The official cash rate is now 1.0% after the RBA’s last reduction in July 2019 in the continuing hope of stimulating economic growth.

But while the experts have been monitoring the manoeuvrings of the RBA, changes to the lending rules have seen the major banks be slow to pass on the full reductions on new loans to both investors and home owners. What does that mean for you?

Introduction

With so much uncertainty surrounding who now has more control over setting mortgage interest rates - the Reserve Bank or the banks - it is timely to think about your loans and whether they are structured to suit your needs into the future. One of the most obvious considerations for your home mortgage is whether a fixed or variable rate loan is best for you.