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What’s your tolerance for interest rate rises?

By Juliet Helmke 23 November 2021 | 1 minute read

Low-interest rates may present an opportune moment to add further properties to your portfolio, but a mortgage expert wants investors to make sure they’re making decisions now with a view of how the situation could change.

interest rate rises

Speaking on a recent episode of The Smart Property Investment Show, Peter White AM, the managing director of Finance Brokers Association of Australia (FBAA), urged investors to get a good picture of their tolerance level for rising interest rates.

“Our recent research on Australian mortgage and rental affordability showed that people who are paying a mortgage and people who are paying rent cannot afford an increase of $300 a month – 57.5 per cent of people cannot afford a $300 a month increase in their rent, or a 1 per cent increase on the average home loan,” he shared. 

And according to FBAA’s report, close to half of all Australians (47 per cent) would be financially strained if their housing payment were to go up by $200 per month, or $50 each week. 

Mr White calls this data “critical” and urged investors to use the insight to plan ahead for rising rates.

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“Interest rates will move. You can see the banks upping their fixed rates; they’re planning on rates moving in the future. And that future may be closer than what we think and may be out of step with anything the RBA does from a cash rate point of view,” Mr White foreshadowed.

“But when that happens, what we’ve got to watch as investors and people who borrow money, is that there is a tolerance there that snaps the swing, if we’re not careful,” he said. It’s at that point that the country could find itself with a growing number of people “simply not being able to do or to meet the repayments that they’ve already pre-agreed to.”

Adding to this risk, Mr White noted, APRA’s recent decision to increase banks’ loan serviceability expectations could make it harder for people to refinance, giving investors fewer methods of correction if their repayment capabilities become stressed.

“We’ve got to watch how all this plays out, and I think it’s something that I would ask landlords and investors to be sensitive to in their planning,” he advised, acknowledging that some might find it hard to plan ahead for the worst-case scenario. 

“It’s not today. I know it’s not today, but if you’re looking at a three-, five-year strategy on buying a property and flicking it, or a longer-term portfolio investment for 10 years, you need to watch how these things play out,” he said.

In the best-case scenario, according to Mr White, that extra planning will go unneeded. 

“If we’re lucky, it’ll all play out fine,” he said. But based on his experience, having some foresight could stop things from quickly going south. 

Mr White’s been in the mortgage industry for 43 years, and even he was surprised at the organisation’s research revealing how close the financial breaking point was for many Australians.

“That tolerance is a lot less than what I expect it to be.”

You can listen to the full conversation with Peter White here

RELATED TERMS

Interest

Interest is the amount of money charged by a lender or financial institution for a loan, which is calculated as the percentage of the principal amount paid over the loan term.

About the author

Juliet Helmke

Based in Sydney, Juliet Helmke has a broad range of reporting and editorial experience across the areas of business, technology, entertainment and the arts. She was formerly Senior Editor at The New York... Read more



What’s your tolerance for interest rate rises?
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