Navigating the risks of rate rises

2023 has been an historic year for the Reserve Bank of Australia’s (RBA) in raising the cash rate to an 11-year high in an effort to battle inflation.

The cash rate was only 0.1 per cent in early May last year, and it has been lifted rapidly since then — 12 times across 16 months — in the steepest increase in the RBA’s history, to where it’s now sitting at 4.1 per cent.

As the RBA continues to try and curb consumer spending, there are a number of risks that borrowers could face after this series of cash rate rises.

Read on to find out what these are and what you can do to mitigate the risk.

Getting trapped in a ‘mortgage prison’

‘Mortgage prison’ is when you lack the equity or can’t meet the serviceability requirements to refinance your home loan.

Basically, you become stuck in your current mortgage, even if it’s no longer suitable for you.

You can find yourself in mortgage prison if the value of your property has fallen and interest rates have risen.

Venturing into negative equity

A rising cash rate can cause downward pressure on property prices, which can leave some properties in negative equity territory.

Negative equity is when the market value of your property falls below your outstanding home loan balance. That’s right – you owe the bank more than what your property is worth.

Say your property is worth $800,000 and you owe the bank $720,000. If your property’s value dips to $700,000, you’ve landed in negative equity.

Homeowners who took out large loans at low-interest rates with minimal deposits may be at greater risk of venturing into negative equity, particularly if their interest rates have increased and their property’s value has fallen.

Navigating fixed-rate loans

During the COVID-19 pandemic, fixed-rate borrowing increased significantly as borrowers made the most of low-interest rates. Mortgage holders fixed for longer periods, and banks offered fixed rates below variable rates.

Now, many of those fixed terms are expiring. According to the RBA, in 2023, 880,000 fixed rates will expire, while in 2024, 450,000 loans will reach the end of their fixed term.

These borrowers are facing substantially higher interest rates. This begs the question – do you fix at a higher rate or let the loan revert to variable?

Economists are largely split as to whether the cash rate will remain where it is or whether we could see a cut in the next 12 months – which may not be the best news for those who have already re-fixed their home loans.

How to mitigate the risk of a changing cash rate

Build up your equity

There are a few options to explore here:

  • Increase your repayments: If the budget allows for it, increasing your repayment even slightly could help you build up your equity faster.
  • Make repayments more frequently: Paying weekly or fortnightly could help you pay off more of your mortgage each year and build equity.
  • Make extra repayments: Build your equity by throwing a lump sum on the home loan or making a regular extra repayment to get ahead.
  • Renovate: Give your property a facelift and help boost its value, and in turn, your equity.

Consider refinancing

By refinancing, you could secure a more competitive interest rate or a home loan with interest-saving features that may help you pay off the mortgage sooner.

If you’re in a mortgage prison or negative equity territory, it may be difficult to refinance. However, it’s important to speak to us so that we can explore your options and make a plan.

Need help?

The sooner you reach out, the broader the range of choices you’ll have. So get in touch and we’ll take a look at your specific circumstances.

Negotiating a spring bargain

Spring typically sees an uptick in property sales and this trend looks set to continue in 2023.

In the first week of spring, more than 2,400 properties were scheduled to go under the hammer – up 13 per cent compared to the first week of spring in 2022.

Coupled with property prices rising in recent months, it’s important to understand how to negotiate like a pro if you’re on the hunt for a bargain this spring. Read on for our top tips.

Tip 1: Comprehensive research

A deep understanding of the local property market can be a significant advantage. You’ll be in a better position to make an offer or bid with confidence. We provide a range of detailed reports that can offer insights. Whether you’re keen on specific suburb data or an estimated valuation of a particular property, we’re here to assist.

Hint: CoreLogic’s weekly Auction Market Previews are a valuable tool. They provide timely updates, ensuring you’re always informed about market shifts.

Tip 2: Secure your finances

When the right property comes along, being financially prepared can make all the difference. Discuss pre-approval with us now. Having pre-approval gives you confidence during price negotiations with vendors. It may also give you an edge over other buyers without pre-approved finance.

Tip 3: Understand the seller’s motivation

Gaining insights into the seller’s reasons for listing can give you an upper hand during negotiations. What settlement terms and deposits will be most attractive to them?

Are they relocating for work? Might they be open to adjusting the price for a more streamlined settlement process? Sometimes, offering a slightly larger deposit can make your proposal more appealing. Engage with the real estate agent to gather such insights.

Tip 4: Prioritise inspections

Never underestimate the value of thorough building and pest inspections. They can reveal potential issues with the property, which can be crucial during price discussions. If there are significant concerns, you may be able to use the findings from the inspection to negotiate a lower sale price.

Let’s Talk

If you’re in the market for a property purchase, reach out to us to organise your finance pre-approval and set yourself up for a bargain this spring.

7 tips to pay off your home loan sooner

Managing a mortgage can be challenging, especially when faced with growing expenses. However, with a clear plan, you can make significant progress towards paying off your home loan sooner. Read on for our 7 practical tips to help boost your savings.

1. Implement and monitor a budget:

Use budgeting tools like Mint, YNAB, or PocketGuard to make it easy to categorise your spending and quickly review your finances. Regular checks can help ensure you’re adhering to your budget and savings goals.

2. Develop a sustainable plan to cut costs:

Rather than making extreme changes to your lifestyle and spending habits, focus on manageable adjustments to your spending. Consider cancelling those streaming subscriptions you’re not using, learn how to cook your favourite meals at home, or opt for a second-hand or DIY option rather than buying brand new.

3. Use automatic transfers:

Set up automatic transfers for your savings and additional mortgage repayments. This ensures you move your money to where it needs to go before you have a lapse in willpower and spend it. An offset account could also help you to reduce the cost of borrowing by more than you would earn in interest by leaving your savings in the bank. But it could also end up costing you more and limit your access to cash when you need it.

4. Review your loan every couple of years:

How long has it been since you looked at the terms of your mortgage? If your circumstances have changed and you suspect you may struggle to make future repayments, we can assist with a comprehensive loan review. We may be able to secure you a payment structure that makes your repayments more manageable and frees up cash flow.

5. Consider additional income sources:

Realistically, there is only so much you can save. Another way to boost your savings and make extra repayments is to establish an additional income stream. Think about starting a side job, renting out assets, or selling some of the unused items sitting around the house.

6. Opt for lump sum payments:

If you receive a tax return or bonus, think about making an additional mortgage payment. The long-term benefits of additional payments could reduce the life of the loan significantly.

On a typical 25-year principal and interest mortgage, most of your payments during the first five to eight years go towards paying off interest. So anything extra you put in during that time will reduce the amount of interest you pay and shorten the life of your loan.

Make sure to ask your lender if there’s a fee for making extra repayments.

7. Change your payment frequency:

Switching your mortgage repayments from monthly to weekly can offer benefits in the long run. Since interest accumulates daily, this adjustment might lead to savings on your overall home loan.

Need assistance with paying off your home loans sooner?

If you’re looking to kickstart your savings plan and boost your mortgage repayments, reach out to us. We’re here to provide guidance and support.

What is more painful?

What is more painful?

 

Your arm being hacked off with a blunt butter knife, or being a tenant in Dulwich Hill?

 

Just ask any tenant in Dulwich Hill, where last year the average 2-bedroom unit rent was increased by 30%. Now that’s got to hurt!

 

If you think it has been a painful experience for the tenants, let’s spare a thought for the owners. Anyone who has owned freestanding or attached houses over the last 5 to 8 years in Sydney has seen their value almost double in that time, whereas anyone who bought an apartment, is likely looking at the same valuation today as what they paid for it.

 

But wait there is more. If you are an investor, you rely on the rental income you collect to help pay your loan on that property.

 

If you own an investment property, you have seen very little rental growth over the last 7 years. In Sydney over the last 7 years, rents have only risen a tiny 8%. And that’s after the massive jump we have seen in the last year. However, I am betting this is all about to change in a big way.

 

Sydney is experiencing a severe shortage of apartment rental supply. A recent CBRE analysis estimates that fuelled by strong population growth, rental demand is expected to climb by 34,100 apartments next year, but only 15,300 will be available.

 

In our opinion, Sydney apartment owners are about to have their time in the sun, in a huge way. We are forecasting substantial rental increases to continue, which will in turn make owning residential units in Sydney more profitable.

 

Just as many unit investors are giving up and selling their investment property, their timing could not be worse. As the old saying goes, its darkest just before the dawn.

 

Kiril Ruvinsky