For anyone having borrowed money for Australian property over the past few years, these have been very happy times with interest rates at record lows.
The Reserve Bank of Australia’s official cash rate of 0.1%pa has remained unchanged since it was lowered there in November 2020. There seems no real urgency to lift rates in the immediate future, however a stable economy, surging house prices and rising inflation are all issues that would likely cause the RBA to consider lifting rates in the short to medium term.
This is evidenced by the banks all having increased their fixed rate loans over the past few months, where the 5 years fixed rate options have increased from around 2%pa in mid 2021 to now push past 3%pa for owner occupiers and beyond 3.5%pa for investors. This is quite a bit above the current variable rates on offer, suggesting that markets are already preparing for rate rises to come very soon.
I find it amusing that the media in Australia talks about interest rate rises as a threat to the property market and borrowers, but I am not so concerned for two main reasons.
Firstly the rates currently on offer, and even with a few increases by the RBA remain much lower than the traditional interest costs that most Australian borrowers are accustomed to.
Secondly, when you apply for a loan in Australia, the banks are required to assess the your loan approval by using an extra 3%pa interest over and above what you may be offered on your loan when drawn down. Hence every loan in Australia has already been safeguarded that the borrower can afford a lifting of rates of 3%pa to protect them. That doesn’t mean they will be wise enough to respect that and that their lifestyle won’t be severely impacted by the rate rises, but it does mean they have the financial capacity to manage it.
It does remind us that we should be wise with our lending and take the opportunity to ensure you have the best lending packages, including considering the merit of moving to fixed rates before they potentially become more expensive.
Also, you are now entitled to a lower interest rate if you live in your property rather than rent it, so it is important to make sure the bank knows it is your home if you have, or are intending to, move in to a property that was formerly a rented property.
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