With a year of consecutive rate rises that no-one expected, the Australian property market has finished the year quite differently to how it started.

High levels of inflation caused by a range of factors including ongoing conflict in Eastern Europe, extreme weather events, and global supply chain issues have heavily impacted the supply and demand of goods and put pressure on household budgets in ways we haven’t seen for a number of years, in particular utilities, groceries, discretionary spending and the ability to save. The flow on effect from these commodities increasing is the sustained pressure on consumers with mortgages who are also seeing their rates increase each month whilst real wages aren’t increasing at the same level.

Many homeowners are probably wondering when these financial pressures will begin to ease, keeping a keen eye on the big four banks forecasts as to when rates will start to reduce and to what level. Commonwealth Bank seem to be the most optimistic of the four, predicting rates will start falling in late 2023 to 3.35 per cent. On the other hand, the remaining three have predicated rates to fall in early to mid-2024 at either 3.6 per cent or 3.85 per cent. Ultimately, the RBA acknowledges the future for the global economy and households is uncertain, however they are prepared to achieve a soft landing for the economy and overall lower inflation in the near future.

Further challenges in 2023 will come in the form of expiring fixed rates on term debt. An estimated 35% of all outstanding home loans in Australia are currently on fixed rate terms. The expectation is for two thirds of this debt to revert back to variable, causing borrowers to face between a three to four percent increase overnight. The large jump in interest rate will result in borrowers needing to utilise existing savings built through the pandemic period or reduce the amount of net surplus cash available on a monthly basis.

Homeowners’ affordability will also be impacted with any potential future consecutive interest rate rises. As the interest rates increase in 2023, lending institutions will adjust servicing buffer rates accordingly. This will lead to a lack of confidence and clarity from borrowers who are seeking to understand their maximum borrowing capacity. Pre-approved applications will not be valid for extended terms due to the fluidity of the market. Buyers must be wary of their borrowing limits and
ongoing commitments in order to have full confidence in purchasing a property in this ever changing market.

Despite the early indication that Limited Recourse Borrowing Arrangements (LRBAs) in Self-Managed Super Funds (SMSFs) would be banned in 2022, the popular wealth creation strategy remains in play. This may be reviewed in the May 2023 budget however for the meantime, Australians are able to take advantage of this strategy. This presents an opportunity in 2023 for business owners who are currently renting their business premises, to consider using limited recourse borrowing within superannuation to purchase the premises. The benefit for business owners in this approach is the ability to paying off the owned asset, as opposed to paying off someone else’s investment.

At Bentleys Wealth Advisors we always keep a close eye on the lending environment and what this means for our clients. We believe it’s important to have all the necessary information on hand, in order to make the best possible informed decision. If you would like to know more, please contact Bentleys Wealth Advisors on (02) 9220 0700.

 

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This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider you financial situation and needs before making any decisions based on this information. Bentleys Wealth Advisors, trading as Partners Retirement Planning & Investment Advisors, is a division of Partners Wealth Group and an authorised representative of Charter Financial Planning Limited, Australian Financial Services Licensee.