KEY TAKE-OUTS
- The RBA has increased the official cash rate and the banks have passed this on to their borrowers
- The rate rise has already affected buyers trying to secure the finance required to purchase property
- By reason of the rate rise, we have already seen some Purchasers successfully re-negotiate the previously agreed purchase price
So you’ve heard the news … the Reserve Bank of Australia (RBA) has increased the official cash rate for the first time in 11 years.
Home Loans: What happens when the RBA increases the cash rate?
After the RBA’s cash rate decision was made, a number of banks have already passed the increase onto their borrowers by increasing their variable home loan interest rates by 0.25%. This has resulted in an increase to repayments and a reduction in borrowing capacity. If the predictions are correct, the rates are set to continue to increase over the course of this year and into next year.
PropTrack data reveals that a rate increase of just 1% to a $1,000,000 mortgage would increase your monthly repayment by 11.6% (approx. $520 per month, that’s $6,240 per year) and reduce your borrowing capacity by 10.2%.
How the Interest Rate Increase affects Vendors and Purchasers
We have already seen the effects of the interest rate rise on our Vendors and Purchasers. Last week, we saw a First Home Buyer be declined finance approval after the rate rise.
Here’s what happened…
In the Purchasers eyes, it was a ‘no-brainer’. He was certain he was going to receive the finance required to complete the purchase of the property, it was only a matter of time. He paid the agreed 5% deposit to the Agent and signed the Contract in anticipation of Contracts being exchanged as soon as the formal loan approval was issued. He expected to receive formal loan approval within 24-48 hours of having paid the deposit. Within that time, the RBA announced the increase of the official cash rate and the lender he applied for finance through announced they were passing it on. As result, he was declined finance approval. He couldn’t secure the funds required to settle and was forced to withdraw from the sale. The property has since been re-listed for sale. The Vendors are yet to secure another Purchaser. The result was disappointing for all parties involved.
In this instance, the Purchaser received a full refund of the 5% deposit he paid, because Contracts hadn’t been exchanged yet. Had Contracts been exchanged subject to a cooling off period and the Purchaser rescinded during the cooling off period, he would have forfeited 0.25% of the agreed purchase price to the Vendor. Had Contracts been unconditionally exchanged, and the Purchaser couldn’t complete on the due date as a result of not having the finance required to do so, after service of 14 days’ notice, the Vendor would be able to terminate the Contract resulting in the Purchaser forfeiting the 5% deposit and potentially being sued for losses and damages.
After the RBA’s interest rate rise was announced, we also saw a number of Purchasers successfully negotiate a reduction to the previously agreed purchase price just by reason of the interest rate rise. Prior the rate rise, we were seeing Purchasers make offers over and above the top end of the price guide set for properties just so that they could secure it. Now, we have already started to see the balance of power shift – Purchasers want more bang for their buck and Vendors are lowering their expectations and settling for less than what they may have expected to receive 6-12 months ago. When you consider that over the past year, the property market values have increased at rates not seen in over a decade it begs the questions – will the property market crash? Will the property market start to stabilise? Will the property market continue to grow? Just like you, I don’t know the answer and will have to wait, watch and see. If only I had a crystal ball…
ABOUT MELINA COSTANTINO
Melina has over 9 years of experience as a Licensed Conveyancer, acting for client matters involving; purchase and sale of residential and commercial property, Retirement Village Contracts, Put & Call Options, Call Options, and Family Transfers. She is passionate about helping a wide range of clients across all aspects of the buying and selling process and ensuring that her clients meet all their legal obligations.
For further information please don’t hesitate to contact:
Melina Costantino
Licensed Conveyancer & JP
info@couttslegal.com.au
1300 268 887
This blog is merely general and non-specific information on the subject matter and is not and should not be considered or relied on as legal advice. Coutts is not responsible for any cost, expense, loss or liability whatsoever in relation to this blog, including all or any reliance on this blog or use or application of this blog by you.
