At your typical community social event, it is not long before the topic of conversation turns to home loans.
For those with fixed rates maturing in the next 12 months, there is palpable fear regarding the affordability of new mortgage commitments. Even those on floating rates know that they will have to watch their expenses very closely to go through future financial speedbumps.
Thanks to lived experience, we can all resonate with the journey of the regular Indian migrant’s settlement here. They arrive here aged in their mid-thirties, usually with a partner and a young family. Highly qualified, after the initial challenges, they do secure a steady job while the partner may spend more time with the children. Once the children are settled, the partner will look to enter the work force too, often on part-time basis, at times upgrading their skill set. Within 2-3 years of arriving in Australia, with a comfortable and secure 1.5 family income, they look at buying their first home to further consolidate themselves here. Over time, as their income rises, they look forward to building their property portfolio. Many motivating factors can be identified towards this desire: an inherent belief that property cannot fail; peer group pressure; and the fact that property is one investment class they feel confident in (rather than shares or other forms of investments.)
This category of owner/investor may see significant stress in the near future, with a 3% or more rise in interest rates. The Reserve Bank of Australia has indicated that about 1.3 million households could see a greater than 40% increase in their loan repayments. A borrower with a $600,000 mortgage could be paying up to $12,300 per year more on their mortgage repayments from when the interest rates started rising a few months ago. All this could mean record-high mortgage repayments relative to household income.
After years of falling interest rates and low inflation, this sharp increase in repayments, especially at a time when wages are not increasing, will weigh heavily on the family budget. As home prices are starting to fall, those who may have bought property off the plan will be in danger, as well as those who have low equity in their own home or investment properties. Any forced sale can leave the individual with debt which will need to be paid off.
The interest rate hikes have come about due to increasing inflation. But according to some economists, these sharp increases in interest rates and some easing in global supply chains indicate early signs of the Reserve Bank’s attempts to curb inflation is working. By mid next year, interest rates may change their trajectory and start moving sideways or even down.
Till that happens, the advice is to work out the family budget, stick with it and implement relevant wealth preservation strategies.
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