Home Comfort Despite Rate Rises

Three out of five Generation Y mortgage holders are capable of repaying their mortgage at an interest rate of at least 9%, according to a new survey* by Mortgage Choice.

64% of existing borrowers aged 18 to 29 years said they could afford repayments at, or above 9%. Of those, almost half (46%) are prepared to repay at 11% or more.

This demonstrates that Gen Y borrowers, who are more likely to be first homebuyers, are better equipped to tackle the mortgage market than many may think.

Financial markets are predicting that by this time next year the cash rate will have returned to a more neutral level of around 5.5%, which means variable mortgage interest rates will stand at around 8%. Looking at our survey, results indicate a high percentage of existing borrowers will adjust relatively easily to rate rises.

“Of course, a number will still find them a challenge and they certainly can be a deterrent for those looking to buy property and wondering whether they should commit.

With the majority of lenders passing on the October and November interest rate rises, we have seen variable rate loan repayments increase by almost $100 per month, based on an average 30-year $300,000 mortgage with a rate that stood at 5.75% beforehand. If rates increase by a further 0.25% in December and lenders pass it on quickly, the average borrower would be repaying around $150 per month extra before Christmas.

First homebuyers keen to get in before the First Home Owner Boost deadline on 31 December this year need to do their sums now - firstly to make sure they have enough saved for their deposit and purchase costs, which will probably be close to or more than 10% of the purchase price, and secondly, that they are in the mindset to cope with rate rises of at least another two percent.

When considering whether or not you can afford to repay a loan at a higher rate you need to closely monitor all weekly, monthly, quarterly and annual expenses. For example, if a fairly average borrower was to repay their loan at 8%, they could expect their current monthly mortgage repayment of approximately $1,850 to increase by about $305. They have to ask themselves if they can truly live without that $2,155 a month, plus the cost of food and utilities.

Young borrowers may not realise is coping with rate rises could be as simple as cutting back on a night out once a month or avoiding the car wash and doing it yourself. Small sacrifices can put you closer to achieving your dream, and when you consider the reward of living in your own home, it’s well worth it!

The positive effect of a few little sacrifices varies depending on the amount borrowed and the length of the loan term. However, if you take out a loan and down the track you find repayments become a burden you can always shop around and refinance to a more affordable loan, keeping in mind possible costs to do so.”

* The full 2009 Consumer Sentiment Survey results will be announced over the next fortnight.