The cost of mortgages is on the way up again, but that hasn’t put a dampener on the auction market which is entering its biggest weekend since the central bank began hiking interest rates eight months ago.
According to CoreLogic, almost 3000 homes are up for auction across the nation’s capital cities, equating to a rise of 7.2 per cent from the previous weekend when around 2500 homes went under the hammer.
It will be the busiest weekend for home auctions since late May, when around 3200 homes were on the block.
The Reserve Bank of Australia began raising its cash interest rate early in May and has not stopped since.
The cash rate has jumped from a paltry 0.1 per cent to 3.10 per cent this month, after eight consecutive hikes, as the RBA tries to curb rising inflation, which is hurting household finances.
But it hasn’t had much success so far in bringing inflation back into its preferred target band of two to three per cent, with the consumer price index currently sitting at just over seven per cent.
While the RBA’s monetary policy deliberations are generally forward-looking, the rate impacts can lag behind what’s going on in the general economy by up to 18 months.
This suggests there could be more rate increases to come after the RBA holds its first board meeting of 2023 on the first Tuesday in February.
The majority of homes up for sale this weekend are in Melbourne and Sydney – where the median value of housing is running at about $1 million and $750,000 respectively – with both capitals looking at their busiest pre-Christmas auction periods since June and May, respectively.
Many buyers will be considering what kind of mortgage to get – fixed rates for one to five years, which offer repayment certainty over the term of the loans, or floating variable rates, which generally move in tandem with central bank rate changes.
Research published this week by CoreLogic and Aussie Home Loans shows before the COVID-19 pandemic hit in 2020 the cash rate had averaged 2.55 per cent over 10 years – well below the current rate of three per cent-plus.
And before the pandemic, variable rate mortgages were way more popular than fixed rates, mostly because the variable rate was often at a discount to fixed rates.
“But cheap rates through the pandemic created a rare period in which fixed-rate borrowing ballooned, with total housing lending and refinancing on set interest rates peaking at 46 per cent in July 2021,” the research says.
Since the RBA began moving in May, fixed rates have been heading higher, from as low as 1.95 per cent during the pandemic, alongside variable rates.
At the same time borrowers who picked up those low fixed rate loans during the pandemic – most of which are due to expire in 2023 – could face higher repayments of up four percentage points or more over the next 12 months when their mortgages automatically roll over into variable rate.
“Those coming up to the end of their fixed-rate terms may see a big sticker shock in their mortgage repayments,” the CoreLogic and Aussie Homes research warns.
Savvy mortgage seekers might consider the possibility that the RBA could lift the cash rate by another 40 basis points to 3.50 per cent next year.
If that happens, the monthly repayments for a mortgage holder in Sydney on a fixed rate loan of 1.95 per cent expiring in 2023 could see their payments jumping by almost $2000 a month, the research shows.
One thing is clear, though. Fixed rate mortgages aren’t as popular as they were in 2021 and now account for about four per cent of all home lending.
Most banks won’t pass on the latest RBA rate rise until mid-December. The comparable standard variable interest rate is sitting around 7.30 per cent. But it can be as low as five per cent for both variable and fixed mortgage borrowers if they meet certain bank eligibility rules.
“In such a rapidly changing mortgage market, it’s often the case that the home loan many Aussie’s are sitting on may no longer be the right one or the best available in the market for them,” Aussie Home Loans head of distribution Brad Cramb said.
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