Not too long ago the official cash rate was cut to a record low. In this low interest environment, although banks are already raising their lending rates independent of the RBA rates, the idea of jumping on to the property bandwagon might be tempting.
But do the low rates mean that it’s a great time to buy a property? Is it a risk free zone?
In a competitive market, low rates don’t necessarily mean low risk, according to Steve Jovcevski, a property investment expert and home loan negotiator with comparison service Mozo.com.au. Property Observer carried his views a while back.
With low interest rates, many buyers are not doing the necessary research, he says.
In a competitive market, low rates don’t necessarily mean low risk, according to Steve Jovcevski, a property investment expert and home loan negotiator with comparison service Mozo.com.au
“There’s all sorts of factors where you could potentially lose your deposit because you may not fit the criteria, so sort out your finances.”
Failing to consider changing rates or changed personal circumstances in the future could throw that property dream off track if one is not careful.
Patrick Bright, founder of Sydney-based buyer’s agency EPS Property Search, said the excitement of owning a home sometimes gets the better of buyers and they forget to evaluate their finances.
“They base their home loan on their current financial circumstances and don’t take into account their future plans, like starting a family, or allowing for the fact that rates will rise at some time in the future,” Bright says.
Bright says that it is important to remember that interest rates won’t stay this low forever. History shows that once interest rates do begin to rise again they can shoot up very fast. For instance, in just 13 months from October 2009 to November 2010 rates increased by almost 2%.
One of the keys to avoid the trap of rising interest rates is to ensure you can afford repayments on a higher amount.
“There’s no downside to making repayments above your required level as it gives you a safety net in case of difficult financial times or allows you to pay off your mortgage sooner,” says Bright.
In a previous post in Property Observer, investment consultancy Otium shared the most common property investing mistakes. One of them was about fixing rates.
“I remember pre-GFC when rates were high, I got caught up in the hype of needing to own a property. The problem was debt was easy to obtain and I got a house way before I could afford it,” Otium CEO Drew Grosskreutz said.
“Not only was it outside of my affordability, I locked rates at a ridiculous 7.5%. It was just not the time to be fixing and I was caught with high rates until I sold the house a few years later.
“When in doubt, use the variable rate until there are extraordinary low interest times. Even then, consider hedging your bets. Use a good mortgage broker who is willing to advise you and always check with your accountant.”
So, the lesson about how fickle the interest rate environment can be is borne out in this example.