HLIR017 What happens when interest rates increase? (546 words)

Borrowers are currently indulging in record low interest rates, but what happens when rates start to rise, and mortgage repayments become unmanageable? This article discusses interest rates of the past and uses a case study to show the importance of stress testing a loan.

It’s hard to imagine taking out a home loan with an interest rate of 17% per annum or higher, yet that was the reality for homebuyers in the late 1980s and early 1990s. And back then it would have been just as hard to imagine home loan interest rates of less than 3% p.a.

The point is, ultra-low interest rates are not the norm, and while it might be tempting to load up on debt when interest rates are very low, it’s important to understand what can happen to loan affordability when interest rates rise.