Where to from here?

The rise in official interest rates of 25 basis points last month by the Reserve Bank has done little to dampen the enthusiasm of homebuyers. Figures released over the last 2 weeks have shown that the clearance rate of properties at auction has been similar or greater than before the rise. It is expected by some analysts that the end of the higher first home owners grant, coupled with another rate rise will see a 5% decline in the new housing sector over the next 12 months. Others are predicting growth of 5% based significantly on continued confidence in the lowest interest rates in 29 years.

Whatever the result, another increase in rates of .25% should start to have an impact on consumer confidence. With the absence of domestic economic information this week, the focus turns to the consumer and the impact a 1% rise over the next 12 months will have on household disposable income. Clearly the impact of a quarter of a percent has not shaken up current or prospective borrowers, however if rates do rise one percentage point, the impact would have an effect of around $100 per month on a loan of $150,000 over 25 years. Clearly this is significant, and for first homebuyers out there who are enjoying their first home loan, there is major concern. These borrowers have had the luxury of living with very low interest rates over the past 12 months and are about to see what having a mortgage is all about. Seasoned borrowers have weathered the storm of high rates over the years, and are aware of the pitfalls of getting too far into debt. As rates rise, those new borrowers that have taken advantage of the first homeowners grant may begin to feel the pinch sooner than others. Over-commitment, naivety, and lack of understanding of some, will put strain on household budgets and indeed relationships.

The key is to plan for possible rises now. Our advice to consumers in February last year was to continue to pay as much as possible on your mortgage each month, on a weekly basis. Those borrowers that have followed this principle during the last 12 months are reaping the benefits and are able to deal with any potential rise. Those who have not prepared should start now. An increase of $25 per week in your payment from this month will ensure that any predicted rises over the next 12 months are covered, and indeed if rates do not rise a full 1% you will be way in front. The option of fixing your loan is sometimes a difficult decision, given that flexibility can be lost in the process. If you are concerned about fixing, simply adopt this principle of extra repayments; it’s a satisfactory alternative.

Economic data over the next 2 weeks will give a clearer picture as to whether the RBA will raise rates again in June. It is anticipated however that this rise is likely given their announcement.