What is the impact of rising interest rates on first home buyers?

Australian interest rates have been making headlines lately, and many first home buyers are wondering what the impact of rising interest rates will be for them. In this article, we break down the issue and investigate why rates are on the rise, as well as the impact of rising interest rates on borrowers.

Why are interest rates on the rise?

The Reserve Bank of Australia (RBA) – Australia’s central bank – sets the official cash rate. In a nutshell, the RBA says its ‘duty is to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people’. Therefore, it decides to raise or lower the cash rate as needed to contribute to a healthy economy. Australian banks and non-bank lenders consider the current cash rate amongst other factors when setting the lending rates for home loans (as well as for personal loans and credit cards). So while the RBA doesn’t directly set the interest rate on your home loan (this is ultimately determined by your lender), it does play a role. Another word thrown around in the media a lot right now is inflation. Inflation is simply the general increase in prices and fall in the purchasing power of money. Put simply, inflation is a broad measure that indicates the increase in the cost of living - the rise in prices over time. (Have you noticed how much more expensive a coffee is these days? Or a loaf of bread?). When inflation rises too fast, it can cause problems. But one thing that can help to get inflation back under control is increasing the cost of borrowing – in other words, higher interest rates. So while rising rates can sound nasty for individual borrowers, it does have a purpose and benefit for wider society.

What is the impact of rising interest rates on first home buyers?

You’re not here to learn about inflation and the history of the cash rate – you want to know how this will impact your bottom line, right? Let’s walk you through the good and the bad news. While rate rises might seem like only doom and gloom for borrowers, fortunately there are a few silver linings.

More buying opportunities

Higher interest rates tend to slow down the property market as people are more cautious about taking out home loans and buying property. This could mean reduced competition for you and more opportunities to find a property.

Boosted savings

If you keep your savings in a bank account, the interest rate rises may in fact benefit you. Along with a rise in mortgage rates, banks also often increase the interest rate you can earn on your deposit accounts. This means you may be able to grow your savings at a faster rate.

Increased incentive to pay off

A more subtle silver lining to interest rate rises is that borrowers – particularly first home buyers – may be encouraged to pay more attention to their financial situation. They may be more motivated to make sure they are with the very best lender and home loan for their individual circumstances. Of course borrowers are also feeling extra motivation to pay off their loans faster.

Higher repayments

One of the obvious downsides to increased rates for borrowers is higher repayments on home loans. This can have a huge impact on first home buyers who may not yet have any equity in their property and may not have much wiggle room in their budget. Of course it may also prevent some from taking out a home loan in the first place.

Less borrowing power

Home buyers’ borrowing capacity will also have diminished as a result of the interest rate increases. If you’re considering buying your first property, this means you may need to look for a cheaper house or unit than you were planning to. Or you may need to save for longer before you dive into the property market.

What can you do?

Examine your current situation

Interest rates can be complicated at the best of times, but during rate rises it’s especially important to gain a proper understanding. Do plenty of research into interest rates (check out our blog here for help) and the potential impact of rising interest rates for you. Take a thorough look at the ins and outs of your home loan and consider whether you would be better off with a different loan or lender at this particular time.

Speak to an expert

If you’re dealing with the impact of rising interest rates but not sure what to do next, your first move should be to talk to an expert. The Lending Loop team can assess your current situation and advise you on the best path moving forward.

Give us a call today at Lending Loop, and let’s see how we can help!