Blog post by Empower Wealth

Interest Rate Rises in Australia: The Hidden Risk Most People Are Missing

Interest rates are back in the headlines, with plenty of discussion around the possibility of further rate rises in Australia.

And when there’s this much uncertainty, one response we’re hearing a lot is:

“I think I’ll just wait and see.”

Wait before refinancing.
Wait before upgrading the family home.
Wait before buying that first property.
Wait before adding another investment property.

On the surface, that can feel like the cautious approach. But there’s one risk that’s easy to overlook:

While you’re waiting for the market to change, your own options can change too.

If interest rates rise again, which at this point all economists are forecasting a 100% rise before the end of the year, some of the choices available to you today may not necessarily be available tomorrow.

Already have a mortgage? Your refinancing options could shrink

Let’s say you currently have a $500,000 mortgage on a 30-year principal-and-interest loan at 6%. Your repayments would be roughly $2,998 a month.

There may be another lender offering a more competitive rate and, based on your circumstances today, refinancing could be an option.

But what happens if interest rates rise? Which at this point, as Ben mentioned in the video, the market is indicating a 100% chance of one rate rise before year end.

Say your rate increases by 0.25 percentage points, from 6% to 6.25%. On that same $500,000 loan, your repayments would rise to around $3,079 a month, roughly $81 more each month, or almost $1,000 more a year.

But there’s another number that matters when you want to refinance: the rate a new lender uses to assess whether you can afford the loan.

APRA-regulated banks are required to assess new mortgage borrowers using a serviceability buffer of at least 3 percentage points above the loan rate. So at a 6% interest rate, a new lender may need to assess your ability to repay the loan at at least 9%. On our $500,000 example, that’s an assessed repayment of roughly $4,023 a month.

If rates rise to 6.25%, that minimum assessment rate rises with it to 9.25%. The assessed repayment becomes roughly $4,113 a month. That might only look like another $90 a month on paper, but if you were already close to the lender’s serviceability limit, it can make a meaningful difference.

And this is where the risk comes in.

Your income might still be the same.
Your mortgage balance might still be the same too.
But the hurdle you need to clear to qualify with another lender has become higher.

So even though your mortgage itself hasn’t changed dramatically, your ability to refinance it could.

This creates the risk of what’s sometimes referred to as “mortgage prison”.

You can see a better deal elsewhere. You might want to move. But because you can no longer meet another lender’s servicing requirements, you could effectively become stuck with your existing lender.

That’s why, if your mortgage is already putting pressure on household cash flow or you haven’t reviewed your loan for some time, it may be worth understanding your options sooner rather than later.

That doesn’t automatically mean refinancing is right for you. But knowing what options are available today is very different from discovering later that those options have narrowed.

Want to go a step further? Ben also breaks down a few ways to reduce your mortgage repayments in this short video series: How to Reduce Mortgage Repayments in Australia: 6 Practical Ways to Save

Looking to buy? Property prices aren’t the only thing that can change

The same principle applies if you’re:

buying your first home;
upgrading the family home; or
looking for an investment property.

When people decide to “wait and see”, much of the focus tends to be on what property prices might do next. But there’s another important part of the equation:

Your borrowing power.

If interest rates move higher, lender serviceability assessments can tighten and your borrowing capacity may fall.

Put simply, the property you can afford to finance today may not be the property you can afford to finance six or twelve months from now.

If you’re unsure what your current position looks like, the Borrowing Power Calculator in Moorr can give you an indicative starting point.

But if you’re already financially ready to act and the main thing holding you back is a desire to “see what happens”, it’s worth understanding what waiting could actually do to your numbers.

There’s another side to waiting for things to improve

Uncertainty can also keep buyers on the sidelines.

When people are concerned about interest rates, inflation and the broader economy, some pause their plans altogether. That can mean fewer buyers competing for property.

Now consider what could happen further down the track.

If inflation comes under greater control and the outlook for interest rates begins to stabilise, some of the buyers who have been waiting may decide it’s time to act.

First-home buyers. Upgraders. Investors. Households that have put their plans on hold waiting for more certainty.

If enough buyers return at the same time, competition can increase and we’ve seen versions of this pattern before.

Following the Global Financial Crisis in 2008-09, buyer activity strengthened as interest rates fell, affordability improved and confidence gradually returned. And after the initial shock of COVID-19, buyers who had been sitting on the sidelines returned quickly as conditions improved — contributing to a significant lift in housing activity and prices.

Of course, no two market cycles are the same. But history does show us that when uncertainty starts to clear, pent-up demand can return faster than many people expect.

That doesn’t guarantee property prices will rise, nor does it mean trying to perfectly time the property market is the answer. It simply highlights another risk that can come with a “wait and see” approach:

By the time conditions feel more comfortable, you may be competing with more people who were waiting for exactly the same thing.

The hidden risk isn’t just another rate rise. It’s losing flexibility.

So, what should you do?

The answer isn’t to panic. And it isn’t to rush into refinancing or buying a property just because rates could rise.

It’s to know your position before the market makes the decision for you. If you already have a mortgage, speak with your broker and find out:

Is your current loan still competitive?
Could refinancing put you in a better position?
What would another rate rise mean for your repayments and serviceability?
Is there a case for fixing part of your loan?

If you’re thinking about buying, understand your borrowing position today and what another rate rise could do to it. Because the real risk with “wait and see” is assuming nothing changes while you wait. Your borrowing power can change. Your refinancing options can narrow. And buyer competition can return. So rather than waiting for more certainty, get clear on your numbers and your options now.

Know your options while you still have them

Whether you’re reviewing your mortgage or considering your next property move, understanding your position now gives you more information to work with and potentially more flexibility to act.

Start with your existing mortgage broker and ask them to review your lending position.

And if you don’t currently have a broker, the Empower Wealth Mortgage Broking team can review your existing lending, assess your borrowing position and help you understand what options may be available. Learn more here or simply fill in the form below to get started.

Knowledge is empowering but only if you act on it.

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Categories: Mortgage Broking

Tags: Cash Rate, Inflation, Interest Rates, Property Market, Reserve Bank of Australia (RBA)