After the first rate rise in more than a decade from the Reserve Bank of Australia (RBA), there’s early signs that property price growth is already starting to slow across the country with predictions of a further drop to come. We take a closer look at what interest rate rises could mean for first home buyers.
A little perspective on interest rates
Let’s quickly recap the past couple of years. Interest rates dropped to the lowest historical level Australians had ever seen during Covid to stimulate the economy by leaving people with more spare cash to spend. However, these measures were only ever temporary.
As the economy begins to recover, at a much quicker rate than first expected, the RBA has increased the official cash rate to manage future inflation by slowing the amount consumers are spending.
These increases impact all rates in the market, including the interest rates charged on home loans. A rate increase will increase your monthly repayments and potentially reduce your borrowing power, so you can use a mortgage calculator to consider future rate rises in your budget to avoid over-extending yourself.
There’s a lot of speculation around what impact these changes will have on the property market and if demand will slow as a result. Buyers may be less reluctant to rush into a sale, so if you’ve got a deposit saved and pre-approval in place, you could have a better chance of securing a property due to less competition.
Will rate rises affect your borrowing power?
An interest rate rise (or multiple rate rises) may impact your borrowing power, depending on the lender’s assessment criteria. You’ll still be able to borrow, but you might find you’re not able to borrow as much as you once could.
That doesn’t necessarily mean you won’t be able to get a mortgage. You might just have to rethink the type of property to buy, or the area, depending on house prices and what you can afford with your new borrowing power.
Another major consideration for first home buyers is the deposit amount. Many have had to save for longer as property prices continued to creep into a higher bracket, so make sure you do your research to get the most out of any eligible grants or schemes.
Is it the time to buy?
No-one can predict the future and whether house prices will rise or fall. All you can go off is your current situation. If you’re just starting out, reach out to a lender sooner rather than later so you have a rough idea of your borrowing power and what you should be saving for. This will help guide the property type and location you should be aiming towards.
If you’ve been in the game for a while, make sure you have pre-approval in place. Pre-approvals typically have to be updated every 3-6 months depending on your lender and may need to be reviewed to check your borrowing capacity is still correct, but this will help you make an offer within your financial limits if you do come across something you want to buy.
Planning ahead and budgeting for further rate rises is also worth doing and will help ensure you make a realistic purchase you can afford now and into the future.