Australians have not seen inflation this high since the early 1990s, as it climbed to 7.8% in the 4th quarter of 2022. The rise in inflation is the result of extreme monetary and fiscal policy employed by the Reserve Bank of Australia and the Australian government in response to the COVID-19 pandemic. It is also the result of supply constraints, increased fuel prices and rises in the price of food.
The response of the RBA has been the continuous increase in the cash rate beginning May 2022. The cash rate today is sitting at 3.60% (as of 07/03/2022). The interest rate set by the bank and lenders is much higher.
Effects of the high cash rate
The cash rate is a tool that the RBA uses to address inflation and employment levels. The RBA increases the cash rate when inflation is too high. The goal is to return inflation to the 2% to 3% range.
However, the increase in the cash rate also means higher mortgage repayments as the banks pass on the cash rate increase to their customers. It also affects property prices. Australian homes have seen a decrease in value since the RBA started increasing the cash rate last May 2023. As a result, Australians feel less wealthy and are spending less.
How to Prepare for Fixed Rate Cliff
Amidst these challenging economic conditions, the Australian Government has been providing incentives and schemes to get first-home buyers into their first homes. This includes the First Home Owners Grant, First Home Super Saver Scheme, First Home Buyers Assistance Scheme and the Home Guarantee Scheme.
In addition, the New South Wales Government recently launched the First Home Buyer Choice which gives first-home buyers in NSW a choice between paying the stamp duty in full or paying it as an annual property tax.
All this means that a first home buyer can have a chance of owning their first home with just a 5% deposit as long as they qualify for the schemes and grants.
With high inflation, the rise in the cash rate, and the increasing interest rates, as well as the drop in property prices, what should you be doing to navigate the property market?
1. Be realistic.
Be realistic about your budget and understand that you may need to adjust your expectations or wait for more favourable market conditions. Keep in mind that high inflation means high interest rates, which results in lenders charging more in interest making borrowing expensive.
2. Explore your options.
Consider different property types, locations and financing options to find the best fit for your budget and goals. Because of the high-interest rate, most borrowers’ borrowing capacity is decreasing.
Example:
In the past, a double-income household with an income of around $150,000 can borrow between $700,000 to $800,000. Today, this same double-income household (depending if they have kids, a personal loan, a car loan or a credit card), can only borrow between $500,000 to $600,000. This is a result of the high interest rates and living expenses.
3. Negotiate
It’s a buyer’s market right now. With property, prices dropping, and if you’re the buyer, it’s your turn right now to negotiate with the vendor. The vendor and the real estate agents are aware that the prices of properties have already gone down. There is a 10% drop in Sydney so if a year ago the price of that property was $1,000,000, if there is a 5% or 10% drop in the suburb where you’re buying, expect the price to be around $900,000 to $950,000.
4. Monitor interest rates
Make sure you are updated on the current interest rates that banks are offering. Banks are hungry for your business. They have been offering cashback and competitive interest rates to new borrowers.
Negotiate with your existing bank and talk to a mortgage broker to find out what other banks are offering. It’s possible that the loan-to-value ratio (percentage of the loan against the value of the property) of the loan you took out 5 years ago has gone down to 60% or 70%. Banks offer more competitive rates if you have a lower loan-to-value ratio, and at the same time, they’re happy to provide that with cash backs ranging from $2,000, $3000, and even up to $5,000 depending on the loan amount you’re on.
5. Plan for the long-term
It might be time for you to start considering looking into purchasing an investment property. It is possible that you’ve got a lot of equity sitting in your owner-occupied property and you can release that which you can use as a deposit for the purchase of your investment property.
At this stage, you might want to consider doing your first investment property purchase and the only person who can assess you and find out if you can possibly do this is either the bank or the mortgage broker. So speak to the mortgage broker instead. Plan for the long term. It’s possible for you to build wealth through properties and a mortgage broker can guide you through this process.
The increasing cash rate and high inflation and interest rates are probably overwhelming you. If you are uncertain about navigating the property market, seeking from Maverick Finance brokers can be a smart move. With our extensive knowledge of the property market, we can provide you with valuable guidance to help make informed decisions about your mortgage.
Maria Papa is a senior property and finance expert specialising in home loans, investment loans, self-employed loans, alt doc loans, car loans, personal loans, and loan protection. She has offices in Sydney, Melbourne, and Manila. If you have questions, you can call Maria at 0430 144 008 or email her at mpapa@maverickfinance.com.au.
Disclaimer: Your full financial situation will need to be reviewed prior to acceptance of any offer or product.