How Many of You Are Really Feeling The Raise in The Interest Rates?

I guess this question is mostly for home owners (investment/ppor/both)

I assume a lot of folks here own at least one home I’m hoping this resonates with some of you. We recently purchased our first home in the peak of high housing prices (not sure if that’s what it had been called from a long time now) but the raise in interest rates are really making me think of out decision to buy was wrong or should we have postponed it a little longer. We have been planning to buy a family home from quite sometime and it isn’t easy with the current craziness in the market. We purchased a $1.4 mil house with 88% lvr 4 months ago. Bank approved the loan and now we are feeling the heat. Monthly payments have gone up by $1500. It’s taking a toll on our mental health. Is anyone else in a similar boat? How are you handling yourself? Any suggestions how to cope considering more rate hikes?

Comments

  • +4

    Monthly payments have gone up by $1500

    Question is, can you afford it? and adjust your non-essentials lifestyle spending if required?

    I'm sure "Teenage Rouge Bikies Driving with Loud Motorcycles Late in The Night" doesn't help

    • +4

      It sure doesn’t. Though biking activities has reduced a lot since a few days ago. Heard that teenager hit a girl on a bicycle and got arrested.

      Affordability- short answer yes in a short-term. Want to have a second child. Not sure how that’s going to pan out. Scares the shit out of me sometimes. Wonder how others do it when there is so much uncertainty in the world!

        • +16

          Not everyone has an option to wait and also some may place having a kid higher in priority than paying off their new house. Unpopular opinion on Oz Bargain.

          Sounds like aoP and his wife are fairly well off jobs wise so you could also look into bankruptcy but idk how that works. If you do then for sure you won't be the only one it's happening to right now.

          • +4

            @ChupaCabra: *everyone does have an option.

          • +10

            @ChupaCabra: The kids will sure thank mum and dad for it when they lose the house and parents get divorced because they are fighting all the time about money.

            What a stupid piece of "advice" to tell people to just go bankrupt so they can have another kid. Lmao

  • +12

    We purchased a $1.4 mil house with 88% lvr 4 months ago.

    That’s awesome you saved up 170k of deposit

    You should subscribe to ALesha77 blog post on here.

  • +32

    Monthly payments have gone up by $1500

    That's a pretty big jump and quite a bit to slash from your monthly budget to cover it. It seems that rates are going to continue rising, so if you already have trouble affording it now, you might need to consider selling and getting a more affordable place on your own terms (instead of leaving it until the last minute, where you might be forced to sell in a hurry).

      • +86

        It's always an option

        • +15

          Or default on payment

        • Not an option …for idiots

      • +35

        No, selling isn’t an option for us

        That's the attitude that got you stuck with a house you can't afford, during a period where interest rates are climbing fast.

        There's a strong possibility you could default on your loan and the bank will sell your house (that could leave hundreds of thousands out of pocket, since the prices are falling and they won't wait around for the best price, etc).

        Selling is obviously a much better option than that.

    • +9

      Or get a person In to rent a room if possible ?

      • Then that portion of the house is subject to capital gains tax when you sell. Although there are unlikely to be any capital for some time in this case.

        • +1

          It would be apportioned assuming that the ATO will even know if someone is staying and paying rent, which is easy to arrange without declaring.
          but still better than defaulting.

      • +5

        From OPs previous posts, it sounds like there's young kids in the family so it may not be very convenient to have a stranger in the house.

        But it's all a matter of OPs priorities. He's going to have to sacrifice something to have a chance of getting through this.

        • +4

          sacrifice the child!

          sacrifice the child… to Mammon!

    • It is called downsizing and only option he has… at least looks like…

  • +11

    I am afraid that's what RBA Phillip Lowe wants to see, people cut down spending and service their debt more.

    Can I assume that you do not have much saving left with 88% LVR on $1.4mil house? You probably need to live frugally, for the next few months, to save up enough 3 - 6 months expenses, it will give you some buffer to breath.

    Otherwise you can just change the mortgage to interest only to ease the short term pain.

    Just hang in there.

    • Thanks. Your assumption is right. Things are pretty narrow at the moment. Buffer is what we need right how but probably for 12 months or more from what I am hearing and reading.

      • +33

        Are you saying you expect rates/repayments to be high for "12 months or more" and then… fall back down to record lows again?

        And then stay there?

        I'm not sure that's the most likely scenario.

      • +5

        Sorry about your situation but seems you overstretched your comfort zone Mortgage rates have gone up 1.25%.

        Banks will loan you more then one could ever afford. I learned that 35 years ago when bank loan me double I felt comfortable with a +- 3 % change. It appears you took the bait from the bank.

        Two Options “sell and get out and breath again”

        or bite the bullet and see if interest only option +3% you could handle the cost?

        • +13

          Sell that $1.4 million dollar house for $1.2 million and lose an instant $200 k and also the stamp duty paid before and cop the selling costs as well.So probably around $275k actual loss. And then what hunt for a rental??

          Just stick it out Op if you are thinking of staying in that suburb long term.

      • +6

        12 months or more? This is just a return to more normal interest rates. We haven't even hit the peak yet. It's not going back to the unusually low levels we had in 12 months. Sorry.

      • +6

        Who on earth would loan you $1.2 million with only $168k savings when you can't afford a 2% interest rate rise? That's insane, and it sounds like you followed the sheep and overcommitted to decades of debt slavery. This is what's wrong with the property market in Australia, and this is why prices are so high and why there's a housing crisis. People wanting it all and wanting it now.

        The interest rate rises since May have cost me approximately $20 extra per month.

  • +16

    I fixed all of my home loans at or below 1.9% last year…phew!! Gives me a bit of time to save up before I end up like OP.

    Sorry OP feel your pain. Rates are likely going o rise at least 1.0-1.5% more. Is there anything you own that you can sell like a second car??

  • +56

    From what I have seen here over the years, almost everyone on OzB is on well over $150k/year after tax, owns a huge house, drives an investment Benz and has 15+ rental properties… no one is feeling the pinch unless it’s on their smashed avo toasties down at St Kilda for Sunday 2pm “breakfast”…

    • +100

      Remaining ozbargainers get into car accidents without comprehensive insurance, and seek clarification on NSW road rules. :(

      • +14

        Seek advise *

      • +3

        I noticed that too! It’s a very strange Ozbargain phenomena. All these rich folks driving expensive cars and not having car insurance. I guess, when you’re that wealthy, you can afford to pay out the damage entirely or flee the country at moment’s notice.

    • +5

      I can relate except for the breakfast part. More like 3pm.

    • +3

      no one is feeling the pinch unless it’s on their smashed avo toasties down at St Kilda for Sunday 2pm “breakfast”…

      Smashed Avo on toast isn't the status symbol it used to be 🤣

      • +18

        Can confirm, all the hipsters are all about Smashed Lettuce at the moment.

      • neither is St Kilda

    • +7

      Except the bank actually owns the house and the cars are leased or financed.

      Not criticising anyone but $1.4 million house with $168k deposit means repayments are $63k pa principal and interest on 2.1% over 25 years

      Increase of 2.5% sends it to $83k.

      You’re then looking at needing an income of at least $110k just to service the loan.

      • +2

        Banks would have benchmark the home on 6% interest too so Op combined income would be much higher.

        I think Op just needs to do a budget and cut back on spending in a very big way,start eating at home, quit alcohol/smoking, stop all non essential subscription (Netflix, Disney, prime,ebay etc.), Sell stuff you bought that you don't need, stop upgrading your phone, get a cheaper mobile plan, stop planning that holiday, stop going out to eat, no more hanging out with mates unless it's free.

        Whatever you do, there's really no point selling unless you want to throw 200-300k in the bin. Time will fix everything as long as you can hang in there for at least 5-10 years.

  • +37

    If you live in Sydney or Melbourne, RIP

    Perth went through a downturn in post 2016 and i saw what it did to some of my colleagues with investment properties and life isn't worth that amount of stress, it broke them mentally. (Even after the 15-20% increase after covid, they're still very heavily negatively geared, looking at 10 years with no, if not negative returns)

    Unfortunately it was straight hype, if you took a step back though from all the newscorp and realestate.com propaganda you knew the financial situations were over stated, the numbers never really added up for the average mortgage. There comes a point where people have to own their own actions and in this case, it'll be a few years of pain while the market equalises, just wait till the interest only investment loans start coming up for renewal. (Don't blame the RBA's guidance - yes it was off, but at the end of the day the RBA didn't force you to buy property)

    I was about to jump in immediately after covid, but the money frenzy (and the fact we were in a recession pre-covid) knew that the pain was going to get worse once the sugar rush was over, now here we are…

    Either cut your losses now or buckle up, its going to be a bumpy ride. Rates still have to go up at least another 2-3% to have an impact IMHO.
    Japan had a 10 year recession before the stock market recovered.

    Also getting a loan that size with an 88% LVR you're asking for it.

    • +2

      So you are saying OP is F*#ckd? what are his option other than selling?

      btw japan has had low intrest rates for ever. Their recession and lack of growth was not due to inflation.

      • +6

        what are his option other than selling

        Defaulting, and the bank selling (for far less than he'll get now).

      • +1

        Nor is our recession due to inflation

      • +1

        Japan is not a good comparison. Their debt is all internal so it can be managed by the Central Bank.

      • his option

        get in two tenants. give them the two larger bedrooms. he, wife and kid in the smallest room.

    • +8

      What happened in Perth was/is sad. We had a good look at the Perth property 4 years ago because of all the spruikers hyping it up that it had recovered and on the way up. Until our close relative told us that their house and their friend's house had been losing 5% each year and still going down. Glad we didn't rush in because of FOMO. It would have wiped us out for 5 years.

    • +14

      the numbers never really added up for the average mortgage

      The average house price in Melbourne is like just under $1m therefore average loan if buying first time would be around $700k - $800k. OP's done well to over stretch and crying poor.

      If you can get a loan for $1m you'd think good income, maybe should have spent some of that money on financial advice.

    • +15

      While what happened in Perth was horrible for many buyers, the situation in Melbourne/Sydney is not even remotely the same. There's no additional demand shock that is triggering a slowdown in home prices. This is simply a reaction to changes in interest rates. Perth is a boomtown that had a massive upwards shock in house prices due to the mining boom, which crashed when it was over. Melbourne and Sydney have booming economies and are both world cities that will not see a downturn similar to Perth in 2016.

      Buying your family home when you can is fine. Yes it would have been cheaper to wait a few months, but a) you can't time the market and b) who knows what other factors would've been in place if you waited a few months (banks may not have approved a loan etc). You are only fkd when you don't have enough money to pay your mortgage, and if that happens, we're all fkd anyway. That's what happened to most of the world during the GFC but for a lot of reasons I don't see that happening in Australia.

      OP isn't completely fkd, they've got their family home. Might have to tighten their budget espicially since it looks like they've massively overleveraged, but they'll be alright in the long term as they've at least managed to buy their home, and judging by the price of their house, the income must be pretty good. The people who are really fkd are the renters without enough savings to buy a house.

      • Admittedly demand isn't going anywhere any time soon, due to the average mortgage size the market is at the mercy of the rates as repayments are becoming very volatile.

        For me, the stress wouldn't be worth it in catching a falling knife.

      • -8

        Great 4th comment in 3 years

      • +3

        And exactly how many immigrants are coming here to prolong the ponzi?

    • +4

      "Japan had a 10 year recession before the stock market recovered."

      The Japanese stock market has not recovered its December 1989 high of 39,000 points, even in 2022. 33 years, down the drain.

    • +1

      it's nice to know that 'property investors' are losing big time..

    • Not sure why people think investment property is a get rich in 5-10 year scheme.

      The power of compounding is really only noticeable between year 30-40.

  • +5

    Not feeling the pinch (yet) but as prospective buyer, definitely seeing house guide prices decrease by decent amount now. Probably more decreases to come as interest rates keep increasing.

    • +7

      I am starting to see listings for places that were advertised at the end of summer re-advertised at a lower price range. Three just in the last week.

      Considering Greater Sydney was stagnant to falling before the interest rate rises, spring "selling" season could be really interesting.

      • -2

        One of my friend who is buyers agent says, good stock is hard to come by so any good property, owners will wait it out till the tide turns or prices stabilise. Also, good properties will always get higher value (location, size, quality of construction…)

  • +21

    Don't really want to be that guy but when you went into this $1.2m loan over 30 years did you factor in that interest rates wouldmove back towards the mean?

    If you didn't, your bank did.

    What did you have in mind in terms of sacrifices or mitigants if this occured?

    As far as buying at the wrong time, we won't know for sure if that is a bad investment because the Eastern states market always seem to recover and go up again. You bought when you believe there was value so can't blame you for that.

    • I think it was inconceivable for OP that interest rate did rise so fast. If this happened over 18 months it would be a different experience. House price would be 2mil by then. Profit

      • +5

        How do you make a profit from the house you are living in? You can only use the excess equity for an investment house, which is not liquid.

        • You release the equity in the house by borrowing more.

          It's no different to selling except you don't need to sell, can still live in the house, no tax implications since it borrowing. Only catch is you have to pay interest if you use the money

          • @SeVeN11: Yes, but that doesn't change your cash flow, or serviceability, unless the investment property is positively geared. So increasing interest rates would still hit you the same.

    • +3

      If you didn't, your bank did.

      My back went through this with me - obviously a good lender. When I first got my loan, it was around 3.5%, they explained what my repayments would be at 5%, 7% and 10% - just in case.

      • That'd good.

        What I meant was that Banks are required (by legislation) to base your application as if the interest rates were 1-2% above what they are currently.

        Furthermore, Banks add their own factors into the calculation depending on how risk adverse they are.

        • Oh yes that's what I understood you to mean.

          Was just adding that my bank also explained this part of the process to me - which was really useful at the time. Pretty much prepared me that rates will rise over the life of my loan.

    • +5

      Maybe OP fudged the numbers on the application… It's not unheard of… Also, only has one dependant.

      • +5

        Maybe fudged? I would say there was definitely some fudge.

        OP should be able to handle a 3 percentage point rise in rates before feeling any pain, so my guess is they under declared their living expenses.

      • Everybody fudge their numbers!

        During the royal commission it suggest majority of borrowers were living at the poverty line (ie. Like pensioners) base on the expense they stated.

        That's why banks are required to add more fudge factors in to show that they are not screwing borrowers.

        Bank assumes you cut back all non discretionary expenses and just live on the pension so that you can pay them.

  • +58

    These are not the "bad times". These are the "normal times" and the last few years have been the "good times".

    If you are hurting now then you probably over extended your borrowing capacity.

    • +6

      It's important to say this over and over, as the banks (and real-estate-mogul-owned media) won't tell you this: the banks will loan you much more than you can afford.

      Why wouldn't they? It's no risk to them if you can't pay the repayments, they just sell the house.

      • +10

        It's important to say this over and over, as the banks (and real-estate-mogul-owned media) won't tell you this: the banks will loan you much more than you can afford.

        This is false, I can guarantee you. I worked in banks for a long time.

        Why wouldn't they? It's no risk to them if you can't pay the repayments, they just sell the house.

        It IS a risk to them to have mass bank repossessions where values will drop and they may have to chase the borrower for the difference. Banks do not want struggling clients on the verge of defaulting, that is risky let alone not profitable.

        • +1

          Banks will weigh up their own risks, not yours.

          They won't hesitate to give you a horribly overextended loan if the risk is acceptable to them.

          A small risk of default is fine as long as they've calculated that them actually losing money (even if they have to sell) is very small.

          Perhaps more to the point, such irresponsibly large loans are incredibly stressful in any period that's not record low interest rates or a long way into being paid off.

          They certainly don't care if your repayments get so high that you can't afford to ever eat out, go to a movie, travel, send your kid on school excursions, buy clothes, pay internet/phone or streaming bills, buy petrol, etc.

          They don't mind if your stress is insane for years and your marriage breaks down because of it.

          That sort of loan is fine for them. They will lend you much more than you can afford.

          • @ItsMeAgro: That's a large part of why they want the deposit to be pretty healthy. It gives them a solid margin for the property rates to fall and still sell over what they are owed. Especially if the buyer managed to make payments for a while afterwards.

      • +3

        Yep, I went through a broker and got a very realistic estimate that I could borrow a max of 300k on 60k PA.

        Meanwhile, people going to banks direct were getting told they should borrow up to 500k.

        • +1

          got a very realistic estimate

          glad to see a real world example of my personal calculation.

        • If you need/depend a bank or broker to tell you how much you can borrow it means you haven't actually calculated it yourself.

          It's a dangerous place and the reason why we have op in the situation they are in.

          Most can figure out how much they can borrow with an excel spreadsheet.

      • +1

        Nonsense. Source: I worked for a bank.

        Bank will weigh up their risks and play very carefully. It’s expensive to repossess. Time, reputation, bad PR, human resources etc..

        • @duchy

          Is it true when a bank repossess a house, it’s primary goal is to recover the cost of the mortgage plus repossess expenses.

        • -2

          Risk is just a box ticking exercise Ike any other audit/compliance function.

          Cost of repossession is bare by borrowers not bank

          Banking in Australia is an oligopoly so borrowers have to use the big 4 directly or indirectly so they always just pay a fine and move on quickly and hope people forget.

    • Best comment. Wise one in a few words.

  • +19

    Monthly repayment up $1500?
    By the end of the year that’s likely to be $3000
    Might be time to have a plan B

    • +2

      Might as well consider plan M&N O P

  • +11

    Hi OP. As others have said, unfortunately it’s very likely going to get worse before it gets better.

    The advice is simple but it’s not going to be easy:

    To give yourself the best chance of weathering the storm, you’re going to have to do some extreme budgeting. You need to spend time and effort in minimizing all your expenses. Any discretionary spending needs to be scrutinized, or better: eliminated.

    Your mental health will improve if you know you’re doing all you can.

    • +10

      Yep. Get a plan. Do the maths.

      What will your budget look like at 5%, 7%, 10%, and 13% interest rates? (If you're young: no, that's not an exaggeration, it's been 17% before).

      Then compare budgets at selling now, VS selling when repayments get too high for you to pay (no matter what other expenses you cut), VS the bank selling when you default.

      You may need to switch to a more modest home or cut down a lot on your other expenses. But get some idea of what each outcome looks like so you can make the right decision.

      Good luck OP.

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