Economists have for some time now being predicting that interest rates will rise as our economic growth has another burst of energy after the Covid-19 recovery!
Yes, they are correct - as one major bank started the increase early last week and others have followed - and certainly some time before our Reserve Bank has signaled any change by raising its own overnight cash rate, which is the rate it charges banks for their own borrowing requirements.
So, what does it mean?
For some economic commentators it means that the high level of borrowing particularly with first home buyers, may lead to some real loan repayment difficulties.
Whilst that may have an element of truth to it, it pays to be aware that banks at application time require mortgage advisers to complete a stringent test of the client’s ability to service the proposed loan.
This generally takes the form of a spreadsheet containing a number of “algorithms” relating to the minimum expenses a bank or lender would expect to see - for the particular family situation presented by the applicants.
Our largest bank requires that the test of applicant serviceability is based on an interest rate of 5.80%, even at the time when many clients were taking out the popular one year fixed rate of 2.19%.
So, if you have any concerns around rising interest rates, rest assured that your bank or other lender has put you through a strict test of your ability to meet any of the demands of interest rate rises!
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