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What Will The Average Mortgage Look Like In The Next 5-10 Years
The average mortgage in Australia is a sum that will continue to rise as the years go by. It is a figure that covers a wide range of different mortgage types and loan products available on the market today. That being said, some factors could potentially affect the average mortgage over the next decade.
The Australian mortgage market is expected to grow. CBA, the nation’s largest bank, estimates that it will increase by 3% to 5% by the end of 2021. This could persist each year for the next decade. Using ABS data, this translates to roughly $700 billion of new mortgages being taken out over the next decade.
“Every decade we think it will be impossible for growth to continue but property just keeps proving to be an incredible asset.” -James Symod, Aussie Home Loans
When you look at the past year up to August 2021, Sydney and Melbourne experienced an increase of between 15.6% and 26%. If mortgage interest rates should continue to rise this way, by the tail end of this decade, prices could be astronomical.
In all honesty, the Australian property market has proven to be quite resilient so far. Many people jumped on the opportunity to make use of the record-low rates. The question now is whether or not the repayments will still seem feasible in the event of a rate increase.
Understanding interest rates
Now that the current interest rates are quite low, more and more people can get a loan for their houses. Exactly what is going to happen in the next few years and what will the mortgage and repayments be like in the future?
“Housing prices have risen almost 11 times faster than wages growth over the past year, creating a more significant barrier to entry for those who don’t yet own a home.” – Tim Lawless, Research Director, CoreLogic
The current interest rate environment is vastly different from what it was 10 years ago, and it’s likely to be vastly different 10 years from now. It’s difficult to predict future interest rates. At the same time, understanding the different factors that go into setting them can help you shape your financial future. Interest rates are set by multiple factors:
Reserve Bank of Australia (RBA)
The RBA sets the cash rate. This is the rate that banks charge each other for overnight loans. Lower interest rates mean banks and lenders can charge borrowers less across the economy, and rising interest rates mean the opposite. The RBA is broadly expected to keep interest rates low until the inflation rate hits its target of 2%. Then additional increases are expected to follow.
The overall level of economic activity affects interest rates. If the economy is growing, there’s more money around. So banks can charge a higher rate on existing loans. However, if the economy is contracting, interest rates are likely to decline to encourage businesses and consumers to borrow and spend.
Governments can change interest rates through various policies like tax cuts or higher spending on infrastructure. These policies can encourage the economy to grow, which lowers interest rates.
What the future could look like
Many people are getting more concerned about the possibility of a rate increase. At the same time though, the Commonwealth Bank doesn’t think we should fret. For one, the CBA is not denying that interest rates will rise again. However, they believe that the rise will not be as dramatic as many assume.
With the new APRA changes, though, banks will be more critical of who gets approved for loans. If you can’t manage an interest rate that’s 3% higher than your loan product rate, it won’t be approved. That’s simply because, with the current low-interest rates, many people are taking on more than they can afford to repay. In June, 20% of the approved loans were approved for people who were borrowing above their means. If this was left to continue, it would have been very damaging to our economy. We are, however, expected to avoid this pitfall with the new APRA changes and as lockdowns ease up.
During the many lockdowns since the pandemic, people have had opportunities to put away more money into savings. When you pair that with government support throughout this time, the CBA thinks Australians can afford a ‘moderate’ increase. Plus, coming into 2020, Australia already had over $200 billion stashed away in people’s offset accounts.
For now, though, house price increases have tempered somewhat since August. However, this year we experienced the biggest rent rise and house value increase in more than 10 years. Demand and prices remain high.
Even throughout the lockdowns, house values consistently rose and interest rates remained low. As a result, more mortgages were taken and more houses were bought. Records show that Sydney saw a 30% increase in the number of real estate sales closed in the year since the pandemic.
Opinions on what the future looks like in regards to the average mortgage in Australia vary a lot. The one thing that remains constant, though, is that we can expect the rates to rise again soon.
If you would like to start planning ahead, consider locking in your current rate or need to chat about the best way to move forward for you, please give our team at MLS Finance a call today.
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