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Interest rates hike: why you don’t need to be afraid.

Australia hasn’t seen an interest rate increase in the last decade. Most first home buyers have no idea what the impact of rising interest rates means to them or the economy. With over 20% of Australian home owners considered “under mortgage stress”, it’s little surprise that fear is a common reaction to projected interest rate increases.

The Reserve Bank of Australia’s decision on May 3 to raise interest rates is projected to increase the average monthly repayment by $88. For most people with a home loan that’s not ideal but isn’t going to have a major impact. The real concern is what happens if interest rates keep going up and up and up.

With all the fear mongering, it can feel that we are teetering on the edge of financial collapse. So let’s consider some of the reasons why you don’t need to worry just yet.


Banks have built in a buffer

If you already have a mortgage, good news – the bank has already accounted for this interest rate hike. 

In October 2021, the Australian Prudential Regulation Authority (APRA) increased the minimum interest rate serviceability buffer to 3%. APRA expects that banks will assess your ability to service loan repayments at 3% above the interest rate.

For example, if a loan product has an interest rate of 2.2%, your eligibility was assessed at 5.2%. If you are approved then the bank believes you can service this loan even if it increases by 3 percentage points.

Even if you got your loan prior to the APRA ruling in 2021, the previous serviceability buffer was 2.5%. So you still have a buffer.


Property growth will still occur

In the past year Australian house prices have increased by 27.5%. This is never-before-seen growth and the largest increase on record.We can’t expect property to continue to grow at that rate forever. It was always going to slow down, and interest rate hikes may be the thing to slow it down. But that doesn’t mean it won’t keep growing. Particularly when you look at a longer term picture. 

All markets will ebb and flow, so even if the interest rate hike causes a lag in property prices, rest assured that property prices are unlikely to go into reverse. They’re just going to hit second or third gear, after sitting on full throttle for the past year.

Keep in mind that when it comes to interest rates and the economy at large, you need to look at the bigger picture. There are so many factors interweaving and they each play off each other in sometimes surprising ways. Don’t forget at the start of the covid pandemic, many were expecting a huge property crash. That prediction couldn’t have been more wrong.


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Disclaimer: The information provided in this blog and video is not legal, taxation or financial planning advice. It has been prepared without considering your specific needs, objectives and personal financial situation. Before acting on this information, we recommend that you consider carefully if it is appropriate for your needs, objectives and personal financial situation. All loan products are subject to lender criteria and approval. Fees, terms and conditions apply.

The average Australian earns $2.07 million over their working life, yet 80% will still find themselves broke after decades in the workforce.

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We look forward to journeying with you on your way to lifestyle choices and wealth.