As the budget for 2022 made apparent, the Coalition is actively aiming to re-jolt the property market into the highs witnessed in the pandemic aftermath. Riding on the various schemes of the government and the multiple respites given to numerous economic sectors, the deposits that new home buyers need to cough up are about to fall.
But there is a catch - it is difficult to currently predict whether to opt for a variable home loan or fixed home loan.
Understanding the Australian Property Market
Over the past couple of years, most Australians in the market for home loans opted for a fixed-rate loan. This made a lot of sense given the uncertainty projected by the pandemic and the unprecedented low-cost loans being offered by banks (made possible by the pro-recovery government policies).
As a result, fixed-rate loans rose from a mere 15% to a staggering 50% of all new lending. But this changed soon with the convergence of the average variable and fixed rate, adding to the woes of millions of recent homebuyers. The reason?
It has become increasingly costly for banks to source fixed-rate loans due to offshore interest rates. On the other hand, the cost of sourcing variable-rate loans is still low. This has prompted banks to shift their focus on pushing variable-rate loans on the customer front, thereby blurring the line between the two loan types.
With that said, the status quo is set to change yet again. The short-term cost of obtaining funds for variable-rate loans is expected to soar, making it likely to become costlier for homebuyers soon. Although this is bad news for new market entrants, it signals an equally bad spell for someone who bought a home 2 years ago.
Scenario: If You Bought a Home in 2021
Suppose that you secured a home loan of $300,000 in May 2021 at a two-year fixed rate of 1.85%. The current monthly repayment would come out to be AUD 1250. However, as mid-2023 beckons and revert rates kick in at 5.5% (according to recent estimates), monthly repayments can soar to AUD 1842. This would be a steep increase of AUD 592 per month or a whopping 47% increase in repayments.
Graeme John, Head Of Growth at Joust, explains this discrepancy, “Revert rates for old, fixed-rate customers are typically high compared to what banks offer to new customers. In this case, the revert rate might have gone up a couple of hundred basis points during the 2-year fixed-rate period, and in some cases, even more”.
This is where things can go awry for a lot of homebuyers.
What Does This Mean For New Homebuyers?
CoreLogic research director, Tim Lawless, provides some insight into this. According to Lawless, a rise of 100 basis points in variable mortgage rates would see a new borrower in Sydney witnessed a monthly increase in mortgage costs of $486. Similarly, a 200 basis point rise will translate into $1,005 in mortgage costs.
At the national level, these figures stand $323 and $668, respectively, for a 100-basis point and 200-basis point lift. Lawless further explained, “Past research from the RBA has pointed to ‘high end’ housing markets with higher investor concentrations being more sensitive to changes in interest rates in the short term.”
“This may be why Sydney and Melbourne markets are already seeing price declines, with more affordable housing markets expected to follow the downward trend eventually.”
What Should You Do?
It is important to note that there is no one-size-fits-all solution in such a scenario. Whether to go for a variable or a fixed rate has to be made on a case-by-case basis and will differ from individual to individual.
For those currently in the market for a home loan, it is essential to take stock of your circumstances.
However, it is important to note that refinancing is always on the table, no matter the circumstances. Such disparity in market conditions is ripe for exploring your refinancing options, this is where Joust can help you bag the correct interest rates.
Joust: A Pro-Customer Home Loans Marketplace
Joust helps consumers connect with relevant lenders and brokers based on their home loan requirements in a digital home loan marketplace. The platform has been built on an open and transparent process that gives customers exposure to never-before-seen home loan products at the lowest interest rates. And all this is based on individual profiles.
The takeaway? Homebuyers can potentially save thousands of dollars, thereby making their homeownership journey a lot more seamless and comfortable. The top two features of Joust are Live Auction and Instant Match.
