Following the June interest rate rise being applied to variable and most fixed rates last week, we are now looking at retail rates in the high 5% to low 6% zone.
Some laggard lenders have not applied the increase, but from experience, they will do a double yoink by 0.5% (50 basis points or points in my speak) next month.
If you are shopping or mid-application with one of these (usually less organised) lenders, get ready to get a double hike next month if you go variable.
Anyway, I digress.
Here’s the problem now: for those who borrowed to their max when rates were at their most abnormal ever at 2-2.5% in 2020->2022, we are now above the servicing or affordability threshold.
Some people can’t compute that just because they can still make repayments at the higher rate in everyday life, by the time the lender applies a +3% servicing loading or buffer… beep-beerrrp… the computer says “NO”.
i.e. if you borrowed at 2.5%, back then at your max, with a 3% buffer taking you to 5.5%, today the calculator would look like, say, 5.8% plus 3% buffer = 8.8%.
The ‘servicing calculator’ will fail. This is the best and worst thing about maths. The numbers are right or wrong. You can or can’t afford it. Simple.
Below is the most simple explanation of this fundamental equation (if you are yawning now, please unsubscribe – you won’t like me in person either):
After tax household income
less
Expenses, including:
Bank-calculated minimum monthly living costs
Existing secured or unsecured loans i.e. car and afterpay, credit cards, etc.
HECS or other liabilities
Less existing and future mortgage repayments PLUS a 3% buffer
At the end of this, do you have $1 surplus monthly funds, yes or no?
If no, you can’t afford it.
Here’s what you must understand: there is a vast disparity between what I call the generosity of lenders.
Some are stingy, others are generous.
We have 31 lenders to try, that’s why brokers dominate the distribution of mortgages by a wide margin. We offer 30-times the choice of one bank.
Factors which determine which lender is tight or looser include the loan term length, base interest rate, individual bank mandated minimum monthly living expense for your family unit and income, reduction/shading of rental, casual and variable income such as bonuses and the formula used for negative gearing add-backs and a range of other things that would make you move this message to ‘trash’ right now.
Yawn, yawn, yawn, I hear you think…
Wake up.
If you get nothing else from this email, know this… if you are coming up to the expiration of a fixed term or struggling with a lender that will not cut the variable rate or offer a reasonable fixed rate, you’ve gotta pull that digit out quicksmart. Pronto. Now. Not tomorrow.
If you don’t, you might be stuck. Maybe for a long, long time. Especially if, as predicted, rates rise another 2 or 3 times.
You’ve been warned.
Book a call with me HERE so we can work out what can be done to help you reduce costs and get ahead. Limited slots available, sorry.
Cheers,
Brodie Brown
Professional Mortgage Broker