With interest rate rises on the horizon, borrowers should be prepared for, rather than fearful of, increasing mortgage repayments, according to Louisa Sanghera, Zippy Financial director and principal broker.
Sanghera, 2021 Australian Mortgage Awards Independent Broker of the Year, said scaremongering about the potential negative impact of rate rises on borrowers was not in line with the reality for the vast majority of mortgage holders.
“For some borrowers, this may well be their first-ever rate rise – but many of those property owners have also experienced once-in-a-lifetime increases to the values of their homes or investment properties over the past year,” Sanghera said. “Property buyers who purchased prior to the pandemic are also generally better off by hundreds of thousands of dollars, with investors also benefiting from strong rental price growth over the same period. This means that their overall net worth has put them in a far better position than if they had never purchased because of an unrealistic fear of interest rate rises, which are a normal part of monetary policy.”
Sanghera said borrowers also already had a built-in financial buffer because mortgage brokers and lenders had been assessing their serviceability using an interest rate that is three percentage points higher than the actual rate on their mortgage – the equivalent of 12 increases of 25 basis points.
“More recent borrowers have the ability to manage higher mortgage repayments, because it was built into their home loan applications from the outset,” she said. “No one is expecting interest rates to rise rapidly; rather, it is much more likely that we will see incremental increases of 25 basis points over a … number of months. It’s also vital to understand that interest rates have been at record lows for more than a decade – well before the pandemic arrived on our shores – so we’re unlikely to see rates soar to 6% or 7% anytime soon.”
Sanghera said borrowers still had time to brace themselves for potential rate hikes.
“If you have a home loan and you haven’t checked out its finer details in the past year, now is the time to do so,” she said. “Many banks will offer new customers a lower interest rate than they do their existing borrowers, so that means your deal from two years ago may not be the best one now.”
Sanghera said borrowers should also use an online mortgage calculator to understand what the changes to their repayments would be when rates rise.
“Once you know how much the difference is, look at your budget to find ways to set this money aside now,” Sanghera said. “This way you’ll know you can afford the repayments when rates rise, and you’ll build up a small nest egg to help you deal with any additional rate increases when they flow through.”
