Talk is often cheap, although it hasn’t been as cheap as cash for the past few years.
That said, money experts have warned us regularly recently that the supply of cheap money was about to end and that central banks across the globe would start to increase rates.
Almost to script, this month, Philip Lowe, head of Australia’s central bank, the Reserve Bank of Australia, finally decided that it was time to increase official interest rates for the first time in over a decade. Dr Lowe and the RBA increased the cash rate by 25 basis points to 0.35%. The RBA boss has taken the lead from his central bank colleagues in the US and Canada, and undoubtedly there are more increases to come.
What does this mean for borrowers?
Tony Haworth, Partner at AAP Finance, says the sky is not about to fall now that the RBA has increased rates. Tony says that property prices have softened, so the property “valuations” will decrease. However, higher living costs and inflation that have contributed to the RBA’s rising rates will impact borrowers and those planning to enter the market anytime soon.
A property valuation is a detailed, legally binding report of a property’s market value. An accredited valuer conducts this report, and a lender needs to see this document before they’ll approve a loan. Lenders require valuations to ensure the property is suitable security for a mortgage. Also, the valuation gives a lender the peace of mind that the agreed sale price will cover the loan if the borrower gets into a financial pickle and is forced into a fire sale of the property. Tony adds, “Shifting valuations have particular risks for those buying property of the plan or have loan pre-approval.”
According to Tony, higher rates and the threat of more increases will impact assessment servicing rates with lenders. “With fixed rates now as much as 1% higher than variable rates, lenders are now using fixed rates as the base for whether a borrower can service a loan,” Tony advises. “For those borrowers sailing close to the wind on serviceability, this may be the difference between a first home or a longer stint on the rental treadmill.”
Impact of cost-of-living pressure
Australia’s inflation rate, called the CPI, jumped to its highest level since the Global Financial Crisis. Now sitting at 5.1%, inflation has been driven up by cost-of-living pressures from rising food and fuel costs. At the core of these cost increases are faulty international supply chains that are still recovering from the pandemic and the devastating war in Ukraine.
Because of these cost-of-living pressures, Tony Haywood says, “We already see a revision in Household Expenditure Measure (HEM) minimum requirements.”
When you’re applying for a mortgage, the fate of your loan application may depend on this measurement tool. Indeed, the HEM can determine whether you can afford your dream home or are rejected for a loan.
Many lenders use HEM to estimate a borrower’s living costs, which helps determine how much money they can afford to borrow for a home.
Some lenders often rely too heavily on the HEM benchmark to approve home loans, a situation that the recent Banking Royal Commission aimed at. Either way, navigating higher interest rates, inflationary pressures or the HEM, the path to a loan approval can be a little rocky. But help is at hand, and this is where working with a finance specialist such as AAP Finance can clear the path towards homeownership.
If you are seeking financing for your first or next home, call AAP Finance today on 1300 141 453.