Looking beyond record low interest rates

For home buyers worried about paying the mortgage or those hoping to break into Melbourne's strong housing market, the Reserve Bank’s decision earlier this month to not to increase interest rates was good news.

But although the cash rate remains at a record low – just 2.50 per cent – some banks have already started increasing their fixed term interest rates, which usually begin to rise well before variable rates.  This, along with the current upswing in the market, has raised concerns about affordability, especially for first home buyers.  Their numbers are already at the lowest level on record.

REIV CEO Enzo Raimondo said that the recent strong growth in house prices has been driven in part by the very low interest rates.  

“Despite predictions of a boom, if interest rates start to rise again future price growth could be dampened.

“Our analysis shows that at current interest rates buying a median-priced house of $595,500 would mean a monthly mortgage repayment of about $2,850. This assumes a 20 per cent deposit and excludes stamp duty and other costs.

“But an interest rate rise of 25 basis points could wipe about $15,500 off the price the buyer could afford. This would mean that same mortgage repayment would buy a house priced at only $580,000.  For the home buyer this would mean either settling for the lower-priced house or committing to more debt.

“What goes down inevitably goes up and while it is too early to say just when the Reserve Bank will increase rates it is worth planning for this possibility and considering options.  These include fixing a loan or part of a loan while rates are low and buying before the impact of future rate rises is felt.

“Researching the median prices in areas you would like to live is a good starting point,” he concluded.

Courtesy of REIV.com.au