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Future suffering: First home owners to battle rising rates

There is a storm brewing on the housing front. Jack Han investigates how to avoid getting caught in the shower of rising interest rates.

September 10, 2009

Thousands of first time home buyers have cruised into the housing market this year, and more are trying to squeeze through the door before the end of the First Home Owners Boost . However, with interest rates set to rise, many home owners are sailing into stormy waters.

In a statement released this week, the Reserve Bank justified its 0.25 percent rate increase by mentioning “stronger than expected” economic conditions, which include more stable levels of unemployment than predicted.

The latest Australian Bureau of Statistics (ABS) figures also showed that monthly housing commitments have risen from lows of 50,000 in August 2008 to 64,000 this August – a quarter of which are first home buyers.

Now that thousands of Australians are securing their first home every month, interest rates are sure to shock those who are unprepared to weather sudden increases.

On an average home loan of $270,000 at 25 years, if the interest rate increased from 5.5 to 5.75 per cent, borrowers will be paying an extra $41 a month. And if the trend continues, and interest rates rise by 2 per cent in the near future, home owners will be forced to pay an extra $337 a month, and an extra $100,000 in interest repayments over the term of your loan.

One good factor about the stable economic conditions is unemployment rates, which have increased no more than 0.5 per cent in the last 6 months. However, at 5.8 per cent, most workers are more concerned about “underemployment”, which has forced many into reduced hours and pay, or mandatory leave.

With average monthly earnings at about $3,600, if home loan rates rose to 7.5 percent, many borrowers will be paying half of their income towards their loan, placing them in severe mortgage stress.

Lenders mortgage insurance (LMI) provider Genworth Financial has also highlighted interest rates and unemployment as key issues for hardship in its Mortgage Trends Report, released in July.

It predicted that 15 percent of borrowers will experience hardship in making repayments in the next 12 months, while 21 percent of its survey respondents admitted to have experienced unemployment, redundancy, or reduced hours of work in the last 12 months.

So what can you do to protect yourself from becoming a struggling home owner? The simplest answer is to borrow responsibly. You need to factor in rising rates to your repayment calculations, so making sure that you can afford increases of at least 2 percent will prepare you for the coming years.

If you are already paying a loan, consider making more repayments now while rates are still low, to reduce your future repayments. Many lenders will also offer a reduced rate if you decide to package your credit card or other loans with your mortgage.

Even though interest rates are on the rise, buyers who compare home loans online can always find the lowest rates. Don't let your first home sweep you under debt – start searching for the cheapest deals today and keep yourself afloat.

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