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At the start of every year there is always a lot of talk about what we expect will happen with property prices and interest rates. But this year the talk seems far more earnest. With good reason, as property prices have jumped forward by as much as 20+% in recent years and the media is awash with stories about interest rates going up.

So I thought I would share with you a summary of what what we are reading and our thoughts on these matters…

Continued property price growth in 2022 but its slowing – Strong price growth through 2021 will ease somewhat as the number of properties on the market increase in 2022 and there is growing concern that interest rates rises are on the way.

The result will be continued, but slowed price growth in the range of 3-5% overall but which may be experienced as stronger price growth in the first part of the year with some fall in prices towards the end of the year. Looking into 2023 economists are predicting house prices will fall 5-10%. This will offset some of the gains in recent years but is hardly a collapse given price growth over the last 5 yrs.

Interest rates to rise – The Reserve Bank is predicted to raise its Cash Rate around Aug 2022 (but it may be as early as June). While home loan rates are not solely tied to the RBA Cash Rate, it is a significant contributor to home loan rates so an increase in the Cash Rate will see home loan rates rise. This rate rise will be the first rate movement since BUT it will not be a one off.  Expect to see the Cash Rate rise by 1.5-2% over the next few years.

Could rates increase by more? It is a real possibility. Supply side production issues, world events (particularly with regard to Russia) and inflation overall could place increasing pressure on increase interest rates. Now is a good time to get familiar with the term Stagflation.

Will rates get back to 18%? or even 10%? It’s not likely – certainly not in the foreseeable future.  If rates hit 5 or 6% we are likely to see mortgage stress increase significantly as that would in effect mean home loan rates had doubled.

Fixing your home loan  – Every second call or email from clients at present is to discuss fixing home loan rates. Unfortunately, the perfect time to fix was Oct 2021 when fixed rates were still lower than variable home loan rates. Since then we have seen banks raise their fixed rates and then raise them again and then raise the AGAIN. We may have seen 6 fixed rate increases with a handful of banks.

Right now var interest rates on home loans (as distinct from investment loan rates) for those with lending under 80% should be between 1.99-2.5% pa while fixed rates for 3 yrs are 3.5-4% pa. That means if you fix now you are paying 1.5-2% above the var rate. This “premium” for the security of a fixed rate is high in historical terms. If rates go up 2% as some predict then at some point the fixed rate will be lower than the home loan variable rate…but the question is at what point? Will fixing leave you ahead? Or is the peace of mind it gives you worth it? These are all important questions to consider.

There is some value and merit in fixing for those whose loans are above 80% of the property value, where this is not likely to change in the next 2-3 years. As variable rates on these loans are higher, the merits in fixing are stronger.

A BETTER WAY…At Hatch we would like to see all clients get on the front foot with their home lending right now and through the next 2 years.

Don’t wait for rates to rise and then worry about home loan affordability. Starting today, set your home loan repayments as if interest rates have gone up 2-3% already. Doing this achieves several things;

  • It gets you used to higher interest rates before they become a reality – if you can’t afford the repayments it is vital you work that out sooner rather than later – it will allow you time to consider your options and develop a plan (trim spending, new job with more pay, adding a day pw onto your part time job, and if really necessary sell on your terms/time frame while the market is solid.
  • Increasing your home loan repayments now will allow you to build up a small buffer of extra repayments before interest rates rise to the level you are making payments at. That buffer could come in handy down the track especially if rates keep rising into the future.

What we recommend is not sexy or likely to make great conversation with friends but it will stand you in good stead over the next few years.

 

As always, please reach out to us to discuss your particular situation and the right strategy for you.  The best way to do this is to book a time in my diary and I will call you at that time.

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