What do higher interest rates mean for property prices?

Cartoon model house with up arrows.

Now that inflation has officially run away from us, the RBA pumped the brakes by ending its pandemic era stimulus and hiking the official cash rate 75 basis points over the last two months, bringing it up to 0.85%. 

As a result, gears are set to grind in the booming Australian market, with flow-on effects for both variable interest home loans and property prices expected in the coming months.

Which variable loans have already begun the uptick, and what does this mean for housing affordability in Australia?

RELATED: Will the RBA hike the cash rate in July?

Property prices set to fall as the RBA cash rate makes ripples in the housing market

A gold model house on a touchscreen showing property market fluctuations and interest rates.

Movement to the cash rate has been long anticipated by economists and banks alike, though most predicted a more dovish rise than we've seen in the last two months. Now, variable interest rates sit at an average of 3.61% in Mozo's database. Back in April, the average was only 3.02%.

By the end of June, all big four banks and plenty others will have raised variable home loans by 75 basis points, with more looming on the horizon. 

The cash rate is expected to peak at 2.6% by 2023, which could further drive variable home loans beyond 5%. This number is dreaded by most home loan owners, as over half have never stress tested their mortgage against rate changes and 64% reported they’d be under serious financial stress if rates surpass 5% p.a.

RELATED: Could you handle a rate rise? Stress test your mortgage with our calculator

There’s already evidence interest increases have dampened homebuyer spirits and brought prices down. Auction clearance rates have been gradually slowing all year, indicating a moderate cool down in Australia's hottest property markets.

As a result, Corelogic reported the nation's property values experienced their first month of negative growth since 2020, falling -0.15% for houses and -0.8% for units in May 2022.

Corelogic’s research director, Tim Lawless, explained that multiple factors may be contributing to the lag, including:

  • Housing affordability stress.
  • Higher fixed term mortgage rates. 
  • Burgeoning supply.
  • Depressed consumer sentiment. 

As the cash rate continues to rise, variable mortgage rates will trend higher and reduce buyers’ borrowing capacity and negatively affect serviceability tests. This in turn will flow-on to the house prices, as demand drops and price tags follow suit.

RELATED: What to do if the bank won't lend you as much as you want on your home loan

Given property prices soared to record-shattering heights during the 2021 boom, price drops may be a welcome relief to many hopeful first-time buyers. However, many homeowners now fear a potential loss of home equity, and those with variable mortgages may now find themselves stressing over their repayments.

So what can homeowners do to help manage the increasing costs of housing?

Loan details

Rate change

Repayment change if rates go up

In an unpredictable property market, research is key for hopeful buyers

A woman types at her laptop.
Photo by Christin Hume.

The housing market can be unpredictable and complicated, with multiple factors contributing to its ebb and flow. However, what’s happened can give us vital clues as to where it may be going in 2022, including how homeowners and buyers can manage costs and still break in.

Some strategies you could use to keep costs down include:

  • Save for a bigger deposit. An impeccable budget and tamping down rising living costs could enable you to reduce home loan costs in the long-run. Not only does this help you make repayments, but saving for a bigger deposit reduces your home’s loan-to-value ratio, which could lower your interest rates. Luckily, a rise in the cash rate also makes savings accounts and term deposits more lucrative, since those interest rates are pegged to the cash rate as well. 
  • Consolidate as much debt as possible. Not only will this get your finances in order, but a lack of debt makes home loan applications deeply attractive to lenders. Even HECS debt can come back to haunt you if you’re not careful, as well as having multiple investment properties already under your belt. (Fun bonus though: your shares can make your application look divine). 
  • Refinance your existing home loan. While refinancing sounds scary, it could actually save you a ton of money long-term. Multiple lenders are currently offering $3,000 cashback to refinance your home loan, so talk to your mortgage broker to see if this option could be right for you.
  • Use your home equity to your advantage. While falling prices have got many homeowners nervous about their home equity, you could actually make your equity work for you, sometimes even to nab a cheaper mortgage. Huzzah!
  • Compare and research the market. Variable rates are likely to continue rising for a time, but some lenders offer special discounts (like on CommBank’s new green home loan), and fixing your home loan could be a great way to save long term. It’s all about comparing what’s out there to find something that could work best for you.
  • Research other avenues into the property market. Methods like off-market purchasing can sometimes be more expensive, but they can open you up to new opportunities and skirt the stress of the auction process. 
  • Get government assistance. Eligible applicants in Australia could receive government help for buying a home, like cover for a deposit through the First Homeowners Grant
  • Investigate first home loans. Home loan packages for first time buyers sometimes come with special perks, such as low interest rates, no ongoing fees, and smaller first deposits.

Keen to break into the property market? Head over to our home loan comparison hub, or browse a selection of offers below.

Compare low interest rate home loans - last updated 13 August 2022

Search promoted home loans below or do a full Mozo database search . Advertiser disclosure
  • Unloan Variable

    Owner Occupier, Refinance Only

    interest rate
    comparison rate
    Initial monthly repayment
    3.14% p.a. variable
    3.06% p.a.

    For refinancers only. Built by CommBank, the Unloan is the first home loan with an increasing discount (conditions apply) for borrowers. No application or banking fees. No monthly account keeping or early exit fees. Apply in as little as 10 minutes.

    Details
  • Smart Booster Home Loan

    2 Year Discounted Variable Rate, Owner Occupier, Principal & Interest, <80% LVR

    interest rate
    comparison rate
    Initial monthly repayment
    3.60% p.a.variable for 24 months and then 4.00% p.a. variable
    3.96% p.a.

    Already includes July RBA rate increase. New super low introductory rate home loan for two years. Min 20% deposit. No monthly or ongoing fees. Fast settlement times. Mozo award-winning online lender. Friendly, local Australian based team.

    Details
  • Celebrate Variable Home Loan

    <60% LVR, Owner Occupier, Principal & Interest

    interest rate
    comparison rate
    Initial monthly repayment
    3.79% p.a. variable
    3.79% p.a.

    Fast and efficient online application. Automatic discounts as loan is paid down. Free extra repayments and redraw facility. Zero fees. Min 40% deposit required.

    Details
  • PAYG Home Loan

    Owner Occupier, Principal & Interest, LVR<80%

    interest rate
    comparison rate
    Initial monthly repayment
    3.29% p.a. variable
    3.33% p.a.

    Low variable rate. Ideal for new home buyers or refinancers. Unlimited additional repayments. Unlimited free redraw. Application completely online. Optional 100% offset can be added for $120 p.a.. 20% deposit required.

    Details

* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate, loan amount and term entered. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

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