Thanks to low interest rates, affordability at highest level for over a decade: HIA-CBA index
Mortgage rates below 5% are widely available given the cash rate has remained constant at a record low 2.5%.
Loans.com.au, for example, is offering a mortgage with a comparison rate of just 4.58%, according to RateCity.com.au. BankMecu is offering home loans at 4.7% and State Custodians has a mortgage with a comparison rate of 4.74%.
Such low interest rates, along with slowing property price appreciation, have made housing more affordable at a national level than it has been for more than a decade, according to the March 2014 quarter HIA-CBA Housing Affordability Index, released last week.
The index showed that across the country affordability was at its most favourable level since March 2002.
Affordability improved during the quarter in Sydney, Perth and the Australian Capital Territory, while it remained unchanged in Melbourne. Affordability also improved in regional markets in Western Australia, New South Wales and South Australia.
Properties in Adelaide, Hobart and Brisbane, as well as regional areas of Tasmania, Queensland and Victoria became less affordable, the index showed.
In its affordability calculations, the index uses the Reserve Bank of Australia’s indicator lending rate for the discounted variable rate of all bank loans available to homeowners.
The interest rate used in the March quarter was 5.1%. At that interest rate, monthly repayments on a $350,000 mortgage taken over 25 years are just $2,067, according to RateCity.com.au’s home loan calculator.
While most economists agree there’s little chance of an interest rate rise in the near term, many expect rates to be lifted at some point within the next 18 months.
Variable rate loans are still the most popular type, despite the increasing take up of fixed rate mortgages. This means most people who take out a home loan are fully exposed to fluctuations in lenders’ mortgage rates.
The probability that rates will rise means it is important for borrowers to consider higher interest rates in future when taking out a mortgage.
In the March quarter of 2013, the indicator lending rate was 5.67% and the year before that it was 6.67%.
The same $350,000 mortgage, over 25 years at a 5.67% interest rate would cost $2,185 a month – $118 more than the indicator rate in March 2014.
If rates go back up to 6.67%, as they were two years ago when the official cash rate was 4.25%, monthly repayments would rise to $2401 – $334 a month above current levels.
Over a 25 year period, interest rates will change dramatically. Between mid-1989 and early 1990, banks were charging an average of 17% on standard variable owner-occupied mortgages, according to the Australian Bureau of Statistics. Some commentators say there has been a structural shift in interest rate movements that would prevent rates from reaching those levels again, but higher rates than the existing levels are considered more normal.
As recently as mid-2008, the indicator lending rate for bank discounted variable rates was at 8.95%. Repayments on the $350,000 loan back then would have been $2,925 a month. That’s $858 a month more than the cost at current prevailing interest rates, which could cause significant affordability problems for borrowers who have not planned ahead.
Housing affordability index
* Annualised
Source: HIA-Commonwealth Bank Housing Affordability Index* Annualised