First home owner initiatives to combat rate rise impacts
Home loan variable interest rates are rising on Tuesday next week and fixed rates, which are already sky-high went even higher last week with some of the banks. These interest rate rises alone are impacting how much we can borrow. If this global supply shortage problem normalises sooner than later and these Federal and State government first home owner initiatives are effective, will our residential property market price correction, slow down?
Variable rates rising on Tuesday 5 July, banks to pass on in full shortly after
According to senior Australian economists, the Reserve Bank of Australia (RBA) is expected to raise rates an additional .5 per cent, to take our cash rate from .85 per cent, to 1.35 per cent, on Tuesday 5 July 2022.
On variable, principal and interest (P&I) repayments each month for your home loan, this equates to:
- an extra $136, on a loan of $500,000
- an extra $203 on a loan of $750,000
- an extra $271 on a loan of $1,000,000
Note: Adopted a rate increase of .5 per cent, taking 2.85 per cent to 3.35 per cent, making P&I repayments over a 30 year term, as of 3 Jul 2022.
According to Westpac’s senior economists, we will get to a cash rate of 2.35 per cent by the end of the year and to 2.6 per cent by June 2023 but then we will plateau. See here their predictions:
Have fixed rates gone too far?
All of the lenders on our Black & White Finance panel of more than 30 lenders, have increased their fixed rates considerably, with CBA and NAB raising their fixed rates by a significant amount again, last week. CBA raised theirs by 1.4 percentage points across the board and NAB did similar, raising theirs by 1.1 percentage points. There are though some lenders still offering very competitive 2 & 3 year fixed rates - variable rates seem to be the go-to now.
Do we just now proceed with variable rates for new loans?
If you’re applying for a fixed rate loan, for say 3 years, the bank is assessing it at 9.39 per cent (using CBA's 6.39 per cent + 3 per cent = 9.39 per cent) and this is proving to be significantly detrimental to servicing, which means you're borrowing less now with fixed rates. We explored this in more detail in June’s Black & White Finance update, under the third sub heading, By how much will these rate hikes impact my borrowing capacity?
When looking to maximise borrowing capacities, we are now almost forced to proceed with variable interest rates as the bank is assessing our future repayments at these lower variable rates. In comparison, a fixed rate buffer rate of 9.39 percent as shown above, versus a variable rate buffer rate of 5.85 percent, means you can borrow more with the variable rate given it has a much lower buffer and your future repayments are calculated at a cheaper rate.
Even though we can borrow more with variable rates, the question is, do we want certainty over these future repayments because if we do, we must then look at fixed rates. For that specific loan portion that is set to fixed rates, we won't be able to borrow as much in comparison to leaving it as a variable repayment type. We’re facing this challenge with almost every proposal we're working on.
First home owner initiatives & when global supply chain impacts ease...
According to Westpac’s senior economist, Matthew Hassan, a significant contribution to this domestic inflation which is causing these rates rises, is being caused by supply chain issues here and abroad. This is something you, our readers, know already, but what he believes is that these supply chain challenges could ease by early to mid next year and that will do a lot to help alleviate the pressure that the RBA has with interest rates. He believes then that the property price correction will be softer than expected by some other economists.
Other senior economists believe that the first home owner initiatives which we summarise below, will also cushion property price falls. See here the property price predictions for the next few years and how the correction phase is underway, according to Westpac.
First home buyer initiatives?
There's a host of federal and state government schemes available to first home buyers with more to come in 2023. Here’s a quick snapshot of these first home buyer initiatives, separated into state and federal schemes. Click on the hyperlinks for more details, to take you to our specialised page, where we’ve stripped back all the jargon and made each scheme is easy to understand.
Federal Government Initiatives
Home Guarantee Scheme (HGS) has 2 arms:
First Home Guarantee
From 1 July 2022, the former First Home Loan Deposit Scheme (FHLDS) has been rebranded to First Home Guarantee Scheme for Eligible First Home Buyers (FHBG).
- Required to have a 5 per cent deposit saved with lenders mortgage insurance waived by the government.
Family Home Guarantee for Eligible Single Parents (FHG). Required to have only a 2 per cent deposit saved, and then lenders mortgage insurance can be waived by the government.
New Home Guarantee (NHG) is no longer available from 1 July 2022.
State Government Initiatives
First Home Buyer financial support at the state level(s), they typically have 3 arms but a 4th is available for NSW property in January 2023:
First Home Buyer Assistance Scheme – this scheme is available for first home buyers buying a new home, an existing home or even vacant land. First home buyers may be entitled to a concessional rate of stamp duty (also known as transfer duty) or even exempt from it altogether if they are under the price threshold
First Home Owner’s Grant (New Home) Scheme - $10,000 available to buy a new home or land. Again, purchase price thresholds apply for first home buyers.
First Home Super Saving Scheme – allows you to save money inside your super fund for your first home purchase, making the most of concessional tax advantages. At the moment, the government is only allowing a maximum of $15,000 to be applied for in any one financial year; capped at $30,000 across all years.
First Home Buyer Choice which is set to commence 16 January 2023, providing first home buyers the choice between paying an annual property tax or stamp duty for properties up to $1,500,000.
Final thoughts
As inflation lingers and interest rates rises continue, property prices will further correct as Westpac indicates above. If you're fortunate enough to weather the economic climate and higher interest rate buffers allow you to borrow what's required, there could be some opportunities arising if you can understand what has happened historically and look long term. Especially for first home buyers who are also going to be heavily supported by a host of initiatives shown above but again, if serviceability is permitted. In any case, if you're a first home buyer looking to use one of these initiatives or already have property and a home loan, it doesn't really matter, your finance strategies now more so than ever, need to be smart and in your best interests, to tackle the future economic landscape.
If you want to know more about the different rates, terms, or bank specials on offer at the moment or just have a general question, please send a note to peter@blackandwhitefinance.com.au or click the start today button a little lower. With the help of our amazing team, we will be able to support you.
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