Whether you want to upgrade your home or you’re a first-time buyer, the recent interest rate rise imposed by the Reserve Bank of Australia (RBA) on Melbourne Cup day will be of more than passing interest.
Families, couples and singles in the throes of buying their next or first property will want to know the impact on their pre-approved loan.
And if you’re in that awkward position of being in the middle of a settlement, you’ll be doubly anxious to understand your financial situation.
Meanwhile, sellers will ask whether the rate rise will detrimentally affect their home’s value and prolong the likely time it’ll take to sell. And investors will be tapping calculators, figuring out whether their rental properties remain a good investment, or if it’s time to cash out (deepening the rental crisis).
We’ve now had 13 rate rises since May 2022.
The doubt cast over the real estate market every time mortgage costs increase is more than just a news item. It is fundamentally affecting people’s lives and, all too often, their mental state.
Everyone is caught in the crossfire as the RBA attempts to reduce the nation’s 5.4% inflation to a 2%-3% range.
We’ve created a list of tips to help you understand the impact of a rate rise if you are currently in the market with a pre-approved loan.
Ask questions
Knowing your financial position is far better than guessing it. So, contact your mortgage broker or loans officer to discuss how the latest rate will impact you.
Bottom line
A higher interest rate means higher repayments, so you may not gain final approval for the amount cited in your pre-approval. The only exception would be if you paid a non-refundable fee (sometimes $650) to lock in your pre-approved interest rate at the outset.
Loan cancelled
In certain circumstances, a leader may cancel the pre-approval, leaving their customer high and dry. Although this may be an unlikely scenario when the base rate has increased 0.25%, it is wise to seek assurance from your lender.
Rules change
Lenders may change policies at any time. If they decide to apply tighter lending conditions, you may find your pre-approval cancelled or reduced.
Clock ticking – Pre-approvals usually last three months, after which you must reapply. The time limit exists because lenders are concerned a borrower’s financial circumstances can change beyond 12 weeks. When you consider most settlements are six weeks, you can’t dilly-dally.
Mitigate risk
When rates rise, reconfirm your borrowing capacity. Also, make a judgement on whether rates might move a second or third time during your 12-week pre-approval period. If you think it is likely, restrict your offers to properties you’re confident you’ll be able to afford based on guidance from your broker or loans officer.
Alternative
You can safeguard against rate changes by paying a lock-in fee. However, it’s usually non-refundable, so if you don’t lock away the entire transaction within 12 weeks, you’ll lose your money.