Rands Tax & Business Consultants

High Interest and First Home Buyer 2

Impact of Increasing Interest Rates on First Home Buyers

On 7th June 2022, The Reserve Bank of Australia again surprised Australians and increased cash rates by 0.5%. With this increase, the cash rate now prevails at 0.85%.

RBA and other authorities are monitoring how borrowers respond to higher interest rates and  also how banks cope with a possible increase in bad debts.

With the pandemic, certain households’ savings to income ratio is still high. Therefore, these households have built up large financial buffers that would help them absorb extra borrowing costs.

What does it mean for First Home Buyers? It is more likely that first home buyers to struggle against this backdrop more than ever.

In addition to increased borrowing costs, first home buyers are stretched by higher food costs and mounting energy and fuel expenses. Consequently, it hard for first home buyers to reach their savings goals for the deposit. Soaring interest rates and the higher burden on living expenses make it difficult to satisfy lenders’ borrowing capacity calculators to buy the house which they were planning for.

Currently, the Australian economy is more unstable than we have understood. Australia’s growth is currently affected by global events such as giant economies like China and the US slow down.

It is apparent that we are entering a different scale which has prevailed decades ago. The fast approaching inflation and interest rates are going to have a great degree of impact on homeowners with mortgages, specifically who have taken the benefit of very low fixed rates in past years. These borrowers are to face a sizeable “repayment shock” when they refinance in the coming years.

Wayne Byres, the chair of the Australian Prudential Regulation Authority, told a bank summit on 31 May 2022 that housing made up about 60% of banks’ total loans and had been growing gradually over time. According to Byres, housing loan portfolios have been low-risk and acted as ballast for the industry through turbulent periods even though home loans have been as safe as houses, this pattern is unlikely to continue in the future.

With all these new developments, first home buyers are required to revisit their strategies and budgets to navigate smoothly in this challenging period.

Managing your plans to buy your first home in a rising interest rate climate can be stressful, especially if you have already collected the deposit and are ready to dive in. Being a Mortgage Broker for 7 years navigating first home buyers to venture into the real estate market is what we know best.

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