More recently, three of the big four banks and many smaller lenders have lifted mortgage interest rates due to the increased cost of funding. Lenders source much of their funding from overseas markets where interest rates are rising, unlike here where the cash rate remains at an historically low 1.5 per cent.
This raises the bar for first home buyers and puts added pressure on existing borrowers who are already stretched to the limit. But headline rates can be deceiving. Most lenders still offer discounted rates closer to 4 per cent for eligible borrowers.
Rates on interest-only loans, used mostly by investors, have been increasing for some time. Interest-only loans typically have a term of 1-5 years after which they revert to principal and interest payments. This has raised concerns that investors who took out loans at the peak of the housing boom may struggle to meet higher principal and interest payments. Forced sales could lead to further price falls.
However, as Reserve Bank Assistant Governor, Michele Bullock recently said, “borrowers have been transitioning to principal and interest loans for the past couple of years without signs of widespread stress”.
As mortgage rates begin to edge higher, all borrowers are urged to stress test their capacity to make higher repayments and adjust household budgets where necessary.