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Interest rate rise
Thursday, October 01, 2009
The effect of the recent 0.25% interest rate increase should not initially be of concern to many recent first home buyers. It is the projected increases on the horizon that would have their attention.
For someone who purchased (for example) a three bedroom home with a 30 year $250,000 mortgage paying 5.5%, the effect of a 0.25% increase to 5.75% is an increase from about $327 per week to about $336 per week or about $9 per week.
So it is of course the concern about future increases rather than this first one, as I am sure most home owners could find another $1 per day somewhere in the household budget. A further full 1% increase over time to 6.75% takes that original $327 per week payment to about $374 per week, or $47 more per week, and history would tell us that this sort of rise could be expected during the current tightening cycle; which could take a further year or more depending on which economist you like to bet on getting a prediction right. You can play with these variables using any commonly available mortgage calculator online to check the effect of increases on your mortgage.
Recent first home buyers would have/should have allowed for increases in interest rates, and if they didn't our banks have proven through the GFC that they have been prudent and take higher interest rates into account when approving loans in the first place.
Of course real estate is different from bananas, if they double in price you don't have to buy them, but of course we all need somewhere to live so the other option any remorseful first home buyers would have had is staying in the rental market. Recent statistics show the median rent for a three bedroom house in
We have some concern that higher interest rates may slow the rate of new home construction in the Hunter. Higher migration to the Hunter area (we are a jobs hotspot with many more jobs in the pipeline) combined with the current low rate of new housing starts could see pressure continue on rents in the order we have been experiencing in recent years. This could mean more investor demand for housing and a likely consistent demand from existing and first home buyers. As a result house prices are unlikely to be under any pressure to fall in the lower Hunter despite the tempering of First Home Buyer incentives and higher interest rates.
It may be that the only solace mortgage payers can get from economists projections of future rate increases, is that on current and recent trends, the projection for rent increases is quite likely to keep the same pace!
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