7 June 2023

My interest rate just went up, and I've never been happier that I resisted temptation when borrowing

| Zoya Patel
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The buzz of a first home can turn into a lifetime of misery when interest rates start to rise. Image: Wenjin Chen.

When my partner and I were buying our house back in 2020, like many in my generation, we were mostly just excited to be able to enter the market at all (and as I’ve written before, it was only made possible with parental help). We looked at every run-down, overpriced ex-govvy with delight, all properties automatically becoming our dream house because our dream was contained to just owning a house – we didn’t dare to have too many expectations because we knew our financial limits.

We ended up with a little townhouse as part of a big development. Is it our ideal home? No. Would we have preferred to have a free-standing house with a backyard? Of course. Do we love our home? Absolutely, and we intend to stay here for as long as we possibly can for one important reason: our place is incredibly affordable.

The mortgage repayments over the last 2.5 years have fallen way below market rent, and the property value has increased. We are the beneficiaries now of the insane housing market that presents such a barrier to other people seeking the security of owning their homes. If we can stay here for another decade, we will continue to embed our strong financial position with manageable debt.

READ MORE Ouch! ACT homeowners feel the stress of another rate rise

Just this past week, we received our renegotiated interest rates as our fixed term ended on our mortgage. Our mortgage will be increasing by a third, which is better than what some have experienced, but it is still a big hike in expenses. But as we readjusted our budget, we were so grateful to our past selves who resisted temptation and borrowed within our means.

When we first started applying for home loans, we were convinced no one would lend to us. We didn’t have a huge amount of savings because of time spent living overseas, but we also had no other debt, which played in our favour.

Though borrowing around $400,000 to $500,000 was probably achievable, we were still very anxious after hearing horror stories of other millennials being rejected because of their abundance of streaming service subscriptions and expensive gym memberships.

Instead, the opposite happened – our bank manager typed our income and expenses into his spreadsheet and informed us we could borrow up to $1.5 million. 1.5 million! At that point in time, both of us were earning just over $100,000 each, which is a lot of money in some ways, and also really not a lot of money in comparison to average salaries for our occupations in Canberra.

Suddenly, our actual dream homes were a possibility. Why buy this pokey little townhouse when we could go bid for the 4-bedroom place we liked the look of on a 650 sqm block? The temptation was real – but thankfully, common sense prevailed.

“We can’t afford to pay back $1.5 million,” we said. We could have just about managed it back then on a 2.29 per cent interest rate. But could you imagine the massive impact the rate changes would have had on us now? No doubt we would be looking to sell, to downsize, probably to a house a lot like the one we’re in.

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Was it irresponsible for the bank to make the offer to us? I guess it depends on who you think should be responsible in the broader system for people being saddled with crippling debt, making poorly informed financial decisions, and navigating the complex and inequitable housing system.

But I am very glad that we stayed clear-eyed in the past – we’re still going to be tightening our belts, but we’ve avoided catastrophe by keeping our dreams a little smaller, as sad as that can sometimes feel.

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Lol the author was scared of borrowing $500k while being on a combined household income of over $200k. Post tax disposable income should be at least $130k. Interest bill at 6% is only $30k. Laughable that you think a couple’s living expenses for “gym memberships, stream services, etc” should cost $100k a year!

devils_advocate9:21 am 09 Jun 23

Lmao this mentality is laughable. So if they borrowed their full capacity, $1.5m, their interest bill based on your calculation (interest only lmao) is $90k, more than wiping out one (post tax) income.

Too bad if anyone gets pregnant and ends up on a reduced salary!

What if they are actually sound financial managers and want to save part of their income to invest for actual financial returns (not pretend increases in the paper value of their PPOR)?

Although it is very enlightening to know there are people out there that think like this (unless this is a troll post)

Lol I won’t bother try convincing you of the benefits of leverage. It’s the exact “conservative” mentality keeping poor people poor that they keep all their saving in a low interest bearing deposit account thinking that is smart money management.

devils_advocate3:05 pm 09 Jun 23

It gets funnier and funnier.

Leverage is used to increase returns on an investment.

Imagine exposing yourself to over-leveraging on a primary place of residence that doesn’t produce an investment return.

I used to wonder how the global financial crisis happened and reading comments like yours gives me a big part of the answer.

It also puts the lie to the anonymous claims of financial success you are so fond of making.

Yeah hilarious, imagine hedge funds pumping money into infrastructure such as airports when there is no “return on investment”.

devils_advocate8:23 am 08 Jun 23

Owning a single home that you live in doesn’t really create a “strong financial position”. That is because if you sell it you will have to buy into largely the same market at the same price, defeating any paper-based gains.

The only way to gain is by routinely cashing in profits from multiple investment properties.

Remember: rising nominal house prices do not mean you got richer. It just means the purchasing power of your dollar reduced.

(for most people, the value of your labour reduced).

The only way to gain is by routinely cashing in profits from multiple investment properties. Not in the ACT though, unless you are a pollie and get “special benefits”

devils_advocate9:23 am 09 Jun 23

Yes long-term buy-and-hold in the ACT is basically dead. The 50% CGT discount for investment properties does make it worthwhile to hold on to new builds for a year or so as rentals and then drip feed the units into the market across successive financial years.

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