How to get a home loan when rates are rising?

To have a house of your own is one of the dreams and aspirations for most people; however, the journey to building one is not necessarily smooth, especially when the country’s economy is somewhat recovering from the worst phase and when the home loan rates are rising. But why should that stop anyone from buying a new house?

If you are planning to build or buy a new house, you would probably get in touch with a mortgage broker to facilitate your mortgage. Besides, according to recent data from the research group Comparator, 70 percent of all Australian home loans are organised by mortgage brokers.

Moreover, choosing the right home loan is already challenging because you need to consider the policies and pros and cons. On top of that, the Reserve Bank of Australia governor, Philip Lowe, indicated that the interest rates would likely increase in the upcoming months. As a result, it is essential that your mortgage broker ensures you with relevant information so that you are up to date with the latest details.

For instance, your mortgage broker must inform you of the following:

• How rising increasing rates affects your loan or borrowing capacity?
• The Advantages and Disadvantages of various home loans; for example, variable rate, fixed rate and split rate).
• How to effectively utilise specific features like offset accounts and redraw facilities to protect yourself?
• What are the measures that you should follow to face potential interest rate rises?
• What are the ways through which you can increase your chances of home loan approval?

In addition, you may want to pay attention to some crucial advice by Greg Bloom of 1st Street Financial. He was recently featured in Mortgage Professional Australia’s Top 100 Brokers 2022 list, and many consider him one of the top brokers in the country.

Bloom pointed out that it is vital to remember that increasing interest rates affect the size of your monthly repayments and borrowing capacity. Besides, your borrowing capacity relates to the maximum amount of money the lender will offer you based on a few factors, including your income, debts, living expenses, credit score and deposit size.

Furthermore, every lender has their specific methods of calculating borrowing capacity, but they all stress test a particular person’s application at a rate three percentage points higher than the actual mortgage rate. For instance, if you apply for a home loan with an interest rate of 5.5 percent, you will actually be assessed at a rate of at least 8.5 percent.

Therefore, as the interest rates continue to increase, your borrowing capability naturally drops or decreases. Also, the Reserve Bank’s head of domestic markets, Jonathan Kearns, indicated that every cash rate increase of 0.50 percentage points reduces an average borrower’s maximum loan size by about 5 percent.

So, Blooms suggested that home buyers who are struggling to qualify for finance would do well if they wait a bit longer before applying for a loan. Although people could qualify for a home loan by choosing a different location or home-buying budget, it is better to wait.

Blooms pointed out that it is ideal to prioritise building your career instead of buying a property; progressing in your career direction ensures an assured return on your investment.

Choosing fixed versus variable rates

The fixed-rate mortgage is a better option as the interest rates are on the rise, allowing borrowers to pay an interest rate for a fixed timeframe – typically between one and five years. Blooms explained that this is a strategic move that will protect you if interest rates rise, ensuring some security in the uncertain lending environment.

However, you might end up paying a higher rate than necessary if the Reserve Bank decides to cut rates again. On the other hand, many fixed-rate home loans don’t come with features such as offset accounts and redraw facilities that can save you money in the long term.

Furthermore, there may also be restrictions on making additional repayments, so your mortgage broker must do the needful and inform you regarding the pros and cons, helping you take the right decision.

Preparation for the fixed rate

The RBA has predicted that 800,000 fixed-rate terms are set to expire this year, with many of these borrowers facing a big jump in their repayments. So, if you are one of such borrowers, Blooms recommends you speak to a broker at least six weeks prior to your term expiration, allowing you to get insight into different financing options.

For the time being, you can figure out your new monthly repayment and begin making the repayments if it is a feasible option for you. Consequently, it will help you build a cash buffer, but you also need to review your current budget, as there ought to be some areas where you can make sacrifices.