A young new property owner is regretting her decision as the Reserve Bank of Australia (RBA) hiked interest rates to a 10-year high.
Sammie Baker, 24, strategically bought a Brisbane apartment in July this year when her borrowing capacity was still large enough to secure her dream place, but demand had dropped, meaning she was able to buy exactly what she wanted.
However, she’s now concerned about what will happen if rates continue to go up while her property value goes down, as experts predict will happen in 2023.
“There’s always that notion in the back of my head, will I be able to keep up with it (mortgage repayments),” she told news.com.au.
“There’s always that frightened uncertainty.”
In the final decision for 2022, the RBA pushed up rates for the eighth consecutive month, after hikes began in May from a record low of 0.1 per cent.
The Commonwealth Bank, Australia’s biggest home lender, has changed its forecasts to have the Reserve Bank hiking rates again in February to 3.35 per cent, rather than stopping in December.
It comes as experts have warned in a worst-case scenario that properties could decline in value by up to six per cent.
Ms Baker signed herself up to a 30-year loan after securing the $440,000 apartment for herself.
She paid $22,000 all up to score the unit, which included the deposit as well as legal fees.
“I had some stocks that I liquidated,” she explained.
When she started paying back the bank in July, her monthly mortgage repayments totalled $1986, which was when she was on a variable rate of 2.49 per cent.
But just months later she is paying back $2310 a month and her rate is 5.04 per cent.
That’s not even factoring in the latest hike after Tuesday’s announcement. Her bank is yet to reveal the new rate for customers with a home loan.
“I was planning to buy at the end of last year, I chickened out, I thought I wasn’t ready,” Ms Baker said.
“I’m on a medium wage, I wouldn’t be able to afford what I needed if interest rates kept going up.”
In a potential bad sign of things to come, the people next door to Ms Baker sold their property several weeks ago, and it went for $5000 less than the price she bought her own property for.
Ms Baker says she has to more seriously think about her finances, including overseas trips, unlike many of her twenty-something peers who are more carefree.
Tuesday’s 0.25 per cent increase has taken the average discounted mortgage rate to 6.55 per cent, up from 3.45 per cent in April.
It means that months of interest rate hikes have seen $750,000 mortgages be slugged with an extra $1418 to monthly repayments.
Compare the Market’s General Manager of Money, Stephen Zeller, said that many properties were going backwards in terms of their value, putting borrowers in an even more difficult situation.
“Negative equity creates concerns for borrowers and lenders,” Mr Zeller said.
“So, let’s say you bought a $400,000 property and you borrowed $350,000 from the bank, but then the bank revalued your property and now it’s only worth $300,000- This creates a negative equity position of $50,000.
“But this isn’t always the case. If you’re employed and making repayments on time, the bank might let you off the hook because you’ve just had some bad luck with the way the market has gone.
“But a borrower who is having difficulty making repayments and has negative equity might be asked for extra capital or the bank might pressure them to sell so they can get their money back”.
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