What Do Interest Rates
Really Mean For Your Next Move?

Introduction

Omid: Buying your first home, managing your mortgage, or investing in property, these are big financial decisions. An interest rate can make them even more complicated. But with so much information and so many options out there, how do you know what really matters? Welcome to Straight Answers with Omid Jolan. I’m your host and I’m today joined by my brother and award-winning mortgage broker Azad Jolan, the founder of Your Elite Broker. We are going to have a practical conversation about three questions people are asking right now. Azad, welcome, and let’s get straight into it.

Azad: Thank you very much for having me.

First-home buyers

Omid: Azad, let’s start by with one of the first questions that a lot of people are asking, and that is, with first-home buyers, how are current interest rates affecting first-home deposit strategies?

Azad: Yeah, that’s a very good question. The interest rate obviously is affecting anyone, and with first-home buyers, it’s not so much going to affect the way that they strategize, the way they’re saving for a deposit, but it will affect them more in how much they can borrow to be able to buy their first home. So, their saving will continue as is, but just the amount that they’re able to borrow before and after an interest rate, that’s where it makes a difference.

Existing homeowners

Omid: Fantastic. Thank you, Azad. Azad, now let’s talk about people who already own a home. What options do existing home owners have when refinancing or managing repayments?

Azad: Yep. So, with people that already own a home, it’s really interesting and amazing how, when someone has a home loan, after a couple of years, they pretty much forget about the details and the specifics of that particular loan, and they kind of go in auto mode. So, they just continue making repayments after repayments without really paying attention to interest rates or other options that are available for them in the market.

Reviewing your home loan

So, in terms of options, for anyone that has a home loan, even for more than a year, they should be reviewing their home loan and seeing if they’re on the best possible interest rate.

For example, someone has a home loan for half a million dollars. After one year, the bank, let’s say they’ve got a home loan with a particular bank and their rate is, let’s just say, 6.5%. After one year of having clear repayment history, they can look into the market, other lenders, and there are some banks that will actually look at that particular person favourably because they’ve been able to make repayments on a monthly basis or weekly or fortnightly basis clearly. And when it’s time to refinance them, they’ll look at them with a different set of, let’s say, glasses compared to someone who’s not had the perfect repayment schedule.

How lenders assess a refinance

And let me explain that to you a little bit more. So, how the banks will calculate someone’s, let’s say, borrowing capacity is they’ll look at the current interest rate, let’s just call it 6%, and they’ll add a 3% buffer. And then that borrowing capacity is based on that 9%. So, that’s how the banks will look at it. But when they look at someone that’s wanting to refinance their home, which they’ve had for more than a year with clear history, instead of a 3% buffer, a lot of them will use a 1% buffer or a lower figure than 3%. So, that’ll make it much, much easier for people to be able to refinance their home loan.

Omid: Fantastic. So, just elaborate on this part of this question. So, you advise for people who do have a mortgage to get a health check on that on an annual basis. Is that what you’re recommending?

Azad: Yeah, definitely. Obviously, first things first, you need to make sure that you’re making your payments on time every time. But definitely on the anniversary or anytime after a year, or even beforehand, definitely, it’s worth to do a health check on your home loan.

Investors

Omid: That’s great. That’s great to know. As on the last topic of our conversation for today, whatever you said, that was very helpful. Thank you for that. The last topic, it’s about investors. I know that investors at the moment, they find it a bit tough in today’s market, as we see. How about property investors viewing gross yield versus borrowing costs right now?

Azad: Yeah. So, with investors, just pretty much what I see happening is that they’re very reluctant to make any decisions quickly. So, at the moment, a lot of investors that I’ve been talking to are just sitting on their hands and waiting to see what’s going to happen in the market. That’s not to say it’s all investors, but some of them are waiting. I’ve got investors who are actually thinking this is like the perfect time. So, even though the borrowing cost is higher, they believe that the capital that they will get in, let’s say, medium to long term will outweigh that cost. And the gross yields, they have also, depending on the area, I suppose, has been increasing, which is good to see in a way if you’re an investor.

Rents and investor confidence

But obviously, from a renter’s point of view, it’s not great because it just means that they’re paying a higher rent. But overall, I see investors are a lot more cautious. I’ve spoken to investors who were ready to purchase property, but after, let’s say, a couple of months of what’s happened in the last couple of months with all the news, they’ve just completely backed out and they’re now looking at other forms of vehicles for investing. So, it is a little bit of a mixed bag. There are some that are still really positive on the outlook of just general property, because they believe that in the long term, it’s still a vehicle that’s very profitable, long term.

Where interest rates are heading

Omid: Thank you, Azad. Look, I did say that was one of our last topics, but two questions come to mind when we’re talking about the current market investors and buyers who are wanting to get into the market for the first time. And the first thing is, based on your opinion, I know that it might be hard to predict, but how do you see the future of the interest rate in the next three to six months?

Azad: Yeah, it’s a very tough one. No one can predict it, but it will be a little bit harder before it gets easier. So, there’s a lot of, I guess you could say, experts that believe there will be one or two more rate rises before things start settling down.

And it’s really hard to say, because there’s been times where in the past they’ve said rates will go so many times, but they will increase so many times in, let’s say, the next 12 months. And then four months, five months into it, it’s completely changed because of the numbers that come out. So, it’s one that I guess you have to try to see based on the figures that are given out by the RBA and the governing bodies before a decision is made. So, usually about a month or so, you can have a little bit better picture of what’s going to happen, but it will get a little bit more tougher before it gets easier.

Advice for hesitant buyers

Omid: Fabulous. And the second part of my last question would be, I know you yourself have a bit of a background in real estate as well, so you understand that side of things. And as you know, now we are approaching into a market that it’s more a buyer’s market than a seller’s market. So, for your clients that come to you and they’re trying to get a home loan, if you want to give them an advice in a sense, what would you tell them? And because at this time they are a little bit reluctant and as you said, they’re waiting to see what’s going to happen. So, what advice would you have for them?

Azad: I would say for them to obviously get their finances in order first. So, if you’re even thinking about possibly making a decision on purchasing a first home or purchasing your next home or purchasing an investment property to get your finances in order to see what you’re able to do. And then based on that, having a pre-approval will help you to make a decision if a good opportunity comes up. And there’s no, it’s almost impossible to pick when the bottom of the market will be, like I have my time. So, it’s just a matter of having your tax in order as they say and then making that decision when an opportunity comes up. And these days with so much information out there, it’s pretty easy to find out what’s a good opportunity and what’s not.

Wrapping up

Omid: Azad, thank you for giving us such straight answers. Rates will keep changing but the fundamentals don’t. Understand your numbers and get advice that fits your situation. Thank you for listening to Straight Answers with Omid Jolan. Until next time, make your next property decision with confidence.