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Property Investors Beware: prepare now for looming rate hikes

Borrowers are being warned by one of Australia’s comparison websites finder.com.au/home-loans, to start preparing for higher costs, following possible interest rate hikes by the end of the year.

Their latest monthly survey of Australia’s leading economists and banking experts unanimously predict the Reserve Bank will keep the official cash rate on hold at its board meeting on Tuesday (April 1, 2014), with almost half – five out of 11 experts surveyed – expect the cash rate to rise during the fourth quarter of 2014.

The five experts from Commonwealth Bank, Commsec, HSBC, ING Direct and St George Bank told finder.com.au that the Reserve Bank is tipped to increase the cash rate on Melbourne Cup Day at its November board meeting or by the end of the year.

Experts from National Australia Bank, ANZ, UBS, Resi Home Loans, Heritage Bank and Bank of Sydney expect no change this year, with the latter two forecasting a rate rise early next year.

The general sentiment from the finder.com.au survey was that Australia needs a period of interest rate stability and the current low rate environment has resulted in a successful outcome for consumer confidence and the economy.

Michelle Hutchison, Money Expert at finder.com.au, said now is the time to plan ahead before interest rates start to rise.

“If the official cash rate does increase by the end of the year, it’s likely that we will see home loan interest rates start creeping up before then.

So if you’re an existing borrower, it’s a good idea to review your budget and factor in higher costs now, before interest rates rise.

For every 0.25 percentage point increase, it will cost an extra $50 to your monthly repayments for a $300,000 loan, based on the average variable rate on finder.com.au at 5.37 percent.

If you’re heading out to the auctions this weekend, don’t get swept up by the competition. Stick to your budget and remember to leave a buffer because interest rates are set to rise,”

High auction clearance rates are set to continue across most capital cities this weekend, with the  latest national weighted average clearance rate at 71 percent for the week ending March 23, 2014 – up from 65 percent for the same week last year, according to RP Data.

Sydney held the highest auction clearance rate of 77.9 percent, followed by Melbourne with 71.7 percent and Adelaide at 59.3 percent. Brisbane held the lowest auction clearance rate of the week, with just 37.3 percent of auctions sold and a 2.5 percentage point drop from the same week in 2013.

Perth saw the biggest drop in auction clearance rates for the week of 9.8 percent, sitting at a clearance rate of 57.7 percent.

“It’s great to see that borrowers are confident during this time of stability and are taking advantage of low interest rates by jumping on the property ladder or refinancing their home loan. Despite the finder.com.au survey showing rates aren’t likely to move until at least the end of the year, now is the time to plan for a rate rise.

“Borrowers need to factor in a 2 percentage point increase in interest rates for when they return to normal levels. For a $300,000 loan that means borrowers need an extra $400 every month or $4,800 in a year.

“If borrowers start preparing now by adding to their repayments, it will reduce the impact when interest rates rise,” said Mrs Hutchison.

Auction tips for borrowers:

  • Get a pre-approval: You need to be pre-approval by a lender before you start bidding, which means your loan application has been assessed and you will qualify for a loan. You will need need to put 10 percent of the purchase price down if you win the auction.
  • Attend a few auctions before you bid: This will help give you a sense of the market and feel for the process and the cost of homes in the area
  • Set yourself a limit: Before you go to the auction know the maximum amount you are going to spend or you might end up buying a house that is over your budget. It can be worth bringing a buyer’s agent or a bidding buddy to help you stay within your means.

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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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