Will today’s rate hike affect car buyers?

Will today's rate hike affect car buyers?

Interest rates have risen again, and with the cost of living rising too, that shiny new car you’ve been wanting to buy on a financial basis could be a problem…

Before proceeding, we would like to clarify that the following does not constitute financial advice, it is merely commentary on current market conditions. If you need to make a financial decision, please speak to your financial planner. Talk to us about cars.

On August 2, 2022, the official policy rate set by the RBA (Reserve Bank of Australia) is 1.85 percent, a 0.5 percent increase from July and a 1.75 percent increase from the all-time low of 0.1 percent between November 2020 and May 2022.

What does that have to do with cars?

A lot. In 2017, 90 percent of all car purchases were arranged through some form of financing.

When the RBA raises interest rates, all other interest rates follow suit. That means your home loan, personal loan, and car loan are all affected. Even your credit card rate can go up, so keep that in mind the next time you fill up.

It’s just a small change, why is it such a big deal?

If you’re currently financing a car and comfortably managing your monthly payments, mortgage, and other living expenses, a change in interest rates shouldn’t mean the end of the world, provided your earning potential hasn’t diminished.

However, everyone’s circumstances are different. So consult with your financial planner if you think increasing your monthly repayments might be a challenge.

However, the real problem does not affect those who currently have finances, but rather those who want to borrow money for a new purchase.

I’ve been waiting for my new car to arrive, what does that mean?

When your new car arrives (or even your new car) and you decide to complete the purchase on a financial basis, not only will your repayments be higher than they were a few months ago, but the lender will reevaluate your ability to repay based on the new data, which include not only a higher base interest rate but also a trend of rising interest rates.

In addition to every rate hike since you joined the waitlist, lenders add a few percentage points when assessing a buyer’s ability to pay if interest rates continue to rise.

In other words, the lender will assume interest rate hikes will continue and compare your income to increased repayments on your home loan, living expenses, and car loan.

For some buyers, this means your monthly expenses have increased to the point that the bank’s rating goes from “approved” to “disapproved.”

Are there other options? What if the dealer offers me financing?

When it comes to car financing, there are always alternatives.

Again, we’re not here to give financial advice, so check with your financial planner or even the lender to make sure everything is in order before you hit the showroom.

Dealer financing, personal financing, leasing, and mobile mortgages are all products on the table, and they all work in different ways for each customer.

What happens if I use my mortgage to buy a new car?

If you’ve overpaid on your mortgage to get by or have money in an adjustment account, then it’s a good idea to use that money to buy your next car — while you can still make your mortgage payments.

Home loans typically have a much lower interest rate than personal loans, which means you have less to pay back over the long term. However, remember that you are still adding more debt, which means you must be able to continue to service the loan.

It’s also worth expecting a higher interest rate than today’s market rate of 3.9 percent, because everyone from the financial journalist to the financial industry to the man on the corner expects rates to keep rising for the rest of this year the next.

I have cash under the mattress, is this the “rainy day” we’ve been waiting for?

In a volatile financial market, cash is always king.

If you’re looking to secure a new car and want the least amount of volatility or stress, then paying “real money” is great. However, they are in the minority!

What happens if I don’t get funding?

Most new car contracts are subject to financing. So if things don’t work out based on the new lending criteria, you should be able to walk away. Whether you can get your deposit back depends on the dealer and the existing regulations.

I am looking at a used car, is this still a problem?

Yes, and maybe more.

Many used cars command prices that are much higher than traditional depreciation can account for, meaning you’re paying “above the odds” for a car that’s already a defined price. If the market changes at all and used prices go down a bit, you might find that you have more financial debt than your car will ever be worth, and that’s a terrible position.

This unenviable situation is often referred to as “loan jail” because even selling the car won’t bring you enough money to pay off the loan.

You mentioned a benefit – what is it?

The increasing difficulty in financing will mean that some buyers will not be able to accept their new vehicle. This may open up opportunities for other buyers who are further down the waiting list (or not yet on it) to get into a car sooner than expected.

Especially if you have cash on hand.

Of course, this may mean you need to be flexible on specs, but it could be beneficial to contact your local retailer now, especially if you have an order in the queue.

Does this mean that cars will become cheaper or more expensive?

Global inflation and rising material supply and vehicle production costs have pushed almost all new car prices higher, while a lack of new car supply combined with increased consumer demand has also pushed used car prices higher.

While we don’t see new car prices changing favorably any time soon, we do think the used car market may have peaked, with buyers perhaps reconsidering a purchase until things settle down a bit, which is in The combination with more and more new stocks can lead to used prices normalizing somewhat.

As a reminder, none of this should be taken as financial advice, and if you feel you need to speak to someone before making a major financial decision (such as buying a car), please speak to your lender or financial advisor.

James Ward

James has been part of the digital publishing landscape in Australia since 2002 and has worked in the automotive industry since 2007. He joined CarAdvice in 2013, left the company in 2017 to work at BMW and then returned in late 2019 to take over the content leadership of Drive.

Read more about James WardLinkIcon

Similar Posts:

Asley Simon

Learn More →

Leave a Reply

Your email address will not be published. Required fields are marked *