The Key Fundamental Influencing The Property Market at Present Is:

We spend a lot of time discussing whether property prices are rising or falling. Whilst it is natural to focus on the overall outcome, there are several key fundamentals that cause prices to rise and fall that determine the direction of property prices.

The key fundamental influencing the property market at present is interest rate movements.

With this in mind, there was an excellent article written on Saturday in the Sydney Morning Herald that focussed on what each interest rate increase means for homeowners as well as potential buyers.

Whilst each interest rate increase means an existing owner will have higher repayments, the same increase forces buyers to reduce their lending capacity.

It is this reduction in borrowing capacity that has created a gap in the market between what a seller wants for their property and what a buyer can afford to pay.

Please see the full article below.

This is how high mortgage repayments could go for every loan size

The good news: the pace of interest rate rises has slowed. The bad news: they have not stopped.

The Reserve Bank is still expecting inflation to stand at about 7.75 per cent at the end of the year. And its priority is (still) to return that rate to between 2 and 3 per cent over time, all while keeping the economy on an “even keel”. Even it admits this is a tough ask, with the RBA noting the path to achieving that balance is “clouded in uncertainty”.

The $64,000 question then – indeed more like the $640,000 question based on the average national loan size – is: just how high could your mortgage repayments go?

There is talk, even from the governor of the RBA Philip Lowe himself, that an official rate setting of 3.5 per cent could put the economy into equilibrium.

It’s the supposed ‘sweet spot’, and also where several economists say rates could land. So what does that mean for your mortgage repayment, at every loan size?

Our exclusive number-crunching shows some 31 per cent has been added to everyone’s mortgage payments already, from the beginning of May to today. By the potential end of this hike cycle, that would stand at 43 per cent.

Don’t forget that some economists still believe rates will peak in the middle of next year and then may even start to come down.

Our repayment figures assume you began with a mortgage interest rate of 2 per cent and your rate is now 4.5 per cent. With another 90 basis points of official rises, it will therefore be 5.4 per cent.

What does that mean for a fairly typical $600,000 mortgage?

The repayment has moved from $2543 in May to $3335 today. Crucially, the potential 5.4 per cent top of the cycle would put that monthly cost at $3649. Where we stand today, each 25-basis-points rise adds $85.

If your loan is a more manageable $300,000, you have gone from paying $1272 to $1668 in just six months. Your potential hip-pocket-high might be $1824, and in any case, your 25-basis-point benchmark is $42 per individual increase.

If your loan is more like $900,000, you have gone from paying $3815 to just over $5000, with the maximum possibility a painful $5473. Each rise means your repayment ratchets up $129.

But the total interest paid with these rises is the really sobering thought.

At a $300,000 loan size the interest has more than doubled now to $200,250 (from $81,469). At an average $600,000 size, it has moved from $162,938 to $400,499. At $900,000, the increase is from $244,407 to $600,748.

Now that the average loan size is up around $600,000, it is at a mortgage interest rate of 6.37 per cent that the full-term interest you pay doubles what you originally outlaid.

This is precisely why you should never let your mortgage run full-term but should instead use the low or no-cost tactics to repay it early (this column often covers strategies like how to cleverly use offset accounts, mobilise banks’ money for free, pay fortnightly and more).

Speaking of which, the interest rates cited – remember 4.5 per cent right now – are competitive.

If you are paying over the odds, you are simply throwing away money. Stopping the leakage is a good place to start.

There are quality loans comparable to ‘big four’ products right down in the low 4 per cent range.

What’s more, with refinancing at a record high and tens of thousands of Aussies ditching and switching every month, rival lenders are desperate to sign you up.

However, you may not realise that your existing one will probably also fight hard to keep you. So, even without having to move, you could snare a huge discount.

This is welcome indeed for the tens of thousands of people for whom rate rises already mean that they would not qualify for a new mortgage because they would no longer pass the strict income serviceability test.

Though it’s easy to feel helpless, there are many ways to fight the hikes.