HOW INTEREST RATES AFFECT THE PROPERTY MARKET
You’ve just heard that the interest rates have been lowered and you’re most likely wondering how this affects you. Well, the fact is most of us will be loan-dependent and need financial assistance from lending institutions to buy a home. So, whether you’re a homeowner or a potential homeowner, the interest rate will affect you at some stage in your life.
Below are a few things to bear in mind when it comes to how interest rates affect the property market.
Linked versus fixed interest
Whether you’re buying your first house or a new one, you should always evaluate your options. You can choose to have a fixed interest rate which would cover you from interest increases, meaning you’d be less affected by the change; however, the interest rate can’t be fixed for the full loan term. So, at some point or another, you’ll most likely be impacted by changes in the prime lending rate.
On the other hand, you can choose to keep your interest rate linked to the prime lending rate, which means whenever the interest rate changes, your pockets will feel the fluctuation. In this instance, your monthly repayment will either increase or decrease depending on the interest rate flux.
Decreased interest rate
A decreased interest rate means a lower monthly instalment on your home loan. However, the extra disposable income you have shouldn’t be spent frivolously. Instead, the cut allows you to pay a little extra on your bond account to reduce the loan duration, without impacting your monthly budget. Ideally, you should continue to pay your original bond instalment amount to reduce the loan term and save on interest charges.
Prepare for interest increases
Lower rates mean you’ll be able to afford a larger bond, provided you meet the remaining qualifying criteria. However, you should be mindful of the potential increase in the prime lending rates. To play it safe, ensure that you’ll still be able to afford the bond should it increase between 1-2%.
The effect on disposable income
Lower interest rates indirectly impact the amount of disposable income available within your household, as it makes all your other debt repayments (like on a car or student loan) more affordable. Disposable income weighs heavily in your favour when applying for a home loan. As more buyers qualify for home loans, the demand for property increases. This higher demand can increase property prices and contribute to an increase in a home’s value over time.
Greater profit for investors
If you’re an investor, the increase in demand for property combined with the decrease of the interest rate will boost your property investment earnings. If you have a rental portfolio, you’ll be able to charge the same rent as before, while paying a reduced bond repayment resulting in a greater profit.
The fluctuation in the interest rate will always have an influence on the property market, somewhat for potential buyers, but mainly those who already own property. If you’re already searching for a house, remember that if you want to lessen the impact of an interest rate hike, you should reduce your debt as much as possible.