Experts are urging investors to study the market and plan their next steps carefully before seeking changes to their current mortgage rates.
Given the predictions that the Reserve Bank of Australia (RBA) will raise the cash rate by as early as next year, lenders are gradually increasing their fixed rates.
The most recent move was from ANZ, which raised its investment fixed rates by as much as 40bps points. Here are some of the changes:
- Investment Fixed 2 yrs ≤80% - up by 40bps to 2.84% p.a. (4.50% p.a. comparison rate)
- Investment Fixed 2 yrs 80-90% - up by 40bps to 2.89% p.a. (4.66% p.a. comparison rate)
- Investment Fixed 3 yrs ≤80% - up by 30bps to 3.14% p.a. (4.56% p.a. comparison rate)
ANZ was the latest of the big banks to adjust fixed rates.
In an exclusive interview with Your Investment Property, WLTH head of lending Catherine Mapusua said as the economy rebounds from the impacts of the COVID-19 pandemic, there is an increasing chance for rates to continue to increase.
“Since lifting lockdowns in some of our largest cities, we have seen a pickup in core inflation, giving the RBA confidence to strive towards economic recovery,” she said.
“When this occurs, both short-and long-term fixed-income investors who are caught unprepared to establish a security buffer to meet increased repayments.”
Ms Mapusua said lenders will continue to assess borrowers’ capacity to repay their mortgage at a higher interest rate.
Last month, the Australian Prudential Regulation Authority (APRA) has already raised the serviceability buffer from 2.5 percentage points (pps) to 3pps.
The change means that banks will apply a minimum interest rate buffer that is at least 3% above the loan product rate when assessing applications.
“Instead of losing sleep over the steady increase, investors should start preparing for the shift in the housing market,” Ms Mapusua said.
“Considering the speed at which rates rise and the challenge in predicting this, speaking to a professional about guiding you through a ‘stress test’ can give you an overview of what your financial future will look like.”
Should investors be worried about rising fixed rates?
RentBetter chairman Tony Breuer said investors should take concern in the recent changes to fixed rates, as this indicates that variable rates are likely to rise soon.
“Cash flow is critical to any investment and increases in rates at these historically low levels will mean a high proportional increase in interest costs,” he told Your Investment Property.
“For example, a relatively small increase in rates from 2.0% to 2.5%, is a 25% increase in interest cost.”
These increases will ultimately reduce the cash flow of investors especially for the periods between tenancies, repairs and maintenance, and when reducing debt.
Mr Breuer said other concerns on lending will also impact how investors should view their finances.
“Firstly, APRA, the prudential authority which issues regulations for the banking sector, has foreshadowed stricter lending guidelines for the banks,” he said.
“Those guidelines include the debt-to-income and other serviceability buffers for potential borrowers.”
These stricter guidelines will be enforced as interest rates rise, reducing lending to borrowers who fail to meet the more stringent rules.
“The second additional reason investors should be worried is that higher interest rates usually suppress property price increases and, depending on other circumstances in the economy at the same time, may lead to price decreases,” Mr Breuer said.
Investors should plan now
Ms Mapusua said while a fixed-rate home loan may provide investors with certainty, there are still occasions when committing to this loan type may not be the best option.
“If lenders predict an interest rate increase, they increase their fixed-rate loans above their variable rate in response,” she said.
“Fixed-rate loans have less flexibility and product offerings than their variable rate counterparts. For example, some banks will charge extra to have a redraw option.”
Furthermore, fixed-rate loans often have higher break fees, which could be costly to adjust once investors have already locked in their rates.
“It is not always good to lock things up in unstable economic times, but it is essential to consider your options,” Ms Mapusua said.
“Use this time to build confidence in your investment portfolio by staying informed, educating yourself about future interest rates, and creating a realistic budget.”
Mr Breuer shared similar sentiments but added that interest rates are often very difficult to predict given the external influences.
“The RBA has estimated that it’s cash rate will not increase for another two years or so, but that it may increase earlier if inflation and wages growth are too excessive,” he said.
“Meanwhile, we have seen the Australian banks’ funding costs are increasing, so this may result in out-of-cycle variable rate increases the same as fixed rates.”
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Photo by Joshua Mayo on Unsplash.
