The Implications Of Recent Increased Interest Rate For Home Buyers

The Reserve Bank of Australia (RBA) has recently announced an increase in interest rates. The growth is beyond economists’ expectations and is the highest in the last 22 years as RBI is trying to reduce inflation and keep it under control.

The real state and property cycles are one area where the increased interest rates have an immense impact. We fully understand the dream of the people in Australia to own a home and that the increased interest rate would impact the principal loan amount as well as the repayment cycles. Please read the article and go through the information below to find out how an increase in the interest rates would impact the home loans and their repayments in instalments.

A Change From “All Time Low” to “All Time High”

The pandemic reduced economic activities and caused a financial downturn. RBA reduced the interest rate to as low as 0.1% to boost economic activities and control inflation. The low-interest rate was one of the best environments for prospective home buyers. If the interest rates are low, the homeowners have to pay low interest on their principal loan amount. It results in reduced monthly/quarterly/yearly instalments of repayments.

Many people took loans to buy property and homes due to the low inflation rate. Even those not looking to buy property were purchasing real estate due to lesser repayment costs. There was a spur in real estate transactions and economic activities, which also reflected in the prices of the property and increased competition. The prices of real estate have increased by an average of 22% by April 2022. An average dwelling in Australia costs approximately $ 159,300.

The Huge Interest Rate Hike

Due to the recent developments, there is a 25-basis point increase in interest rates. The interest rates are now 0.35%, from the earlier figure of 0.1%. it is the fastest increase that the Australian market has witnessed in the last 21 years. Australian home loan borrowers would be repaying more on their home loan repayments in the following 18 months due to the increase in the interest rate. It will also impact their access to the loan mortgages as well as competitiveness in the market.

The Interest Rate Hike’s Impact on Home Owners and Loan Borrowers

There are different kinds of mortgages and home loans. The interest rate increase will impact these different kinds of loans in different ways. The exact interest rate will depend on the bank. Therefore, different kinds of loan borrowers may see slightly different increases in repayments. However, if the loan is a “fixed rate” loan, it will not be affected by the increase in interest rate in the short term. The repayment amount and the interest rate on a fixed-rate home loan depend on the terms and conditions of the contract. Loan borrowers can also talk with their loan providers and lenders to find out more about the options available. If you are a homeowner and have taken a loan for it buying your home, you can use your savings to reduce the mortgage. It will reduce the repayment amount and lessen the impact of the increase in interest rate.

Tips for Prospective Home Buyers

If you are trying to buy a home now, your borrowing power may be impacted negatively due to an increase in interest rate. Home loan borrowers will not be able to access high amounts of mortgages. In the aftermath of a hike in interest rates, the lenders may not be in a position to provide huge amounts of mortgage as the repaying capacity of the borrowers has reduced.

Property transactions are likely to reduce now as less number of players can enter or sustain themselves in the property market. Obtaining large loans has also become more difficult. On the positive side, there will be less increase in the prices of the homes, and it will allow the “first-time” home buyers to enter the market.