Experts urge investors to study the market and carefully plan their next steps before seeking changes to their current mortgage rates.
Given the predictions that the Reserve Bank of Australia (RBA) will make: raise the cash interest already next year, lenders are gradually increasing their fixed rates.
The most recent move was from ANZ, which raised fixed interest rates for investments by as much as 40 basis points. Here are some of the changes:
- Investment Fixed 2 years ≤80% – increased 40bp to 2.84% pa (4.50% pa comparison rate)
- Investment Fixed 2 years 80-90% – increased 40bps to 2.89% pa (4.66% pa comparison rate)
- Investment Fixed 3 years ≤80% – increased by 30bp to 3.14% pa (comparison rate of 4.56% pa)
ANZ was the last of the major banks to adjust fixed rates.
In an exclusive interview with Your Investment Property, Catherine Mapusua, WLTH’s head of lending, said that as the economy recovers from the effects of the COVID-19 pandemic, there is a greater chance that rates will continue to rise.
“Since the lifting of lockdowns in some of our largest cities, we have seen a rise in core inflation, giving the RBA the confidence to push for economic recovery,” she said.
“When this happens, both short- and long-term fixed income investors are unprepared to build a safety buffer to meet higher repayments.”
Ms Mapusua said lenders will continue to assess borrowers’ ability to repay their mortgage at a higher interest rate.
The change means that when assessing applications, banks will apply a minimum interest buffer that is at least 3% above the loan product rate.
“Instead of waking up to the steady rise, investors should start preparing for the housing market shift,” Ms Mapusua said.
“Given the rate at which interest rates are rising and the challenge of predicting this, a conversation with a professional about supervising a ‘stress test’ can give you an overview of what your financial future will look like.”
Should Investors Be Worried About Rising Fixed Interest Rates?
Tony Breuer, chairman of RentBetter, said investors should be concerned about the recent changes in fixed rates as it suggests that variable rates are likely to rise quickly.
“Cash flow is critical to any investment and interest rate hikes at these historically low levels will mean a high proportional increase in interest costs,” he told Your Investment Property.
“For example, a relatively small increase in rates from 2.0% to 2.5% is a 25% increase in interest charges.”
These increases will ultimately reduce investors’ cash flow, especially for the periods between rent, repair and maintenance, and in reducing debt.
Mr Breuer said other concerns about lending will also affect how investors should view their finances.
“First, APRA, the prudential authority that regulates the banking sector, is foreshadowing stricter credit guidelines for the banks,” he said.
“Those guidelines include the debt-to-income and other usability buffers for potential borrowers.”
These stricter guidelines will be enforced as interest rates rise, reducing credit being extended to borrowers who fail to meet the stricter rules.
“The second reason investors should be concerned is that higher interest rates typically suppress real estate price increases and, depending on other conditions in the economy at the same time, could lead to price falls,” Breuer said.
Investors need to plan now
Ms Mapusua said that while a fixed-rate home loan can provide investors with security, there are still occasions when taking out this type of loan is not the best option.
“When lenders predict an interest rate hike, in response, they increase their fixed-rate loans above their floating rate,” she said.
“Fixed-rate loans have less flexibility and product offerings than their floating-rate counterparts. For example, some banks charge extra for a revocation option.”
In addition, fixed-rate loans often have higher cancellation fees, which can be costly to adjust once investors have already locked in their rates.
“It is not always good to lock things up in volatile economic times, but it is essential to consider your options,” Ms Mapusua said.
“Use this time to build confidence in your investment portfolio by staying informed, informing yourself about future interest rates, and creating a realistic budget.”
Mr. Breuer shares similar sentiments, but adds that interest rates are often very difficult to predict given the external influences.
“The RBA has estimated that the spot rate will not rise in the next two years, but rather it could rise if inflation and wage growth are too excessive,” he said.
“In the meantime, we have seen Australian banks’ borrowing costs rise, so this could result in an out-of-cycle floating rate increase, just like fixed rates.”
Photo by Joshua Mayo on Unsplash.