When interest rates fall, we all tend to think about home ownership. First home buyers decide that it’s time to get into the market. Upgraders seize the opportunity to list their homes and start looking for their next step up. Investors think it’s time to plan for their retirements and start building a property portfolio.
This all makes sense, but there are a few basic rules are kept in mind.
First home buyers
Owning your own home has long been the Great Australian Dream, and it seems as though soon after young people start working they are being asked when they’ll buy their first home.
Home ownership has its merits – property is a growth asset so it has no capital gains tax if it is your principal place of residence. This means that it can perform less well than other assets and still deliver a greater return upon sale as there is no capital gains tax to pay.
But there is more to think about than tax and a low interest rate, such as:
- Is the loan repayment on the property you like higher than the rent on a similar property? Many areas have exceptionally low rent in relation to the property value, and in capital cities it can be as low as 3%. If this is the case, renting may be the better option, as long as you put the extra funds you now have into an alternative investment or a rental property elsewhere.
- Do you plan to live there for the long term? Buying and selling costs can make up 5 – 7% of purchase price, and unless you plan to stay, you can quickly get behind through buying and selling.
- Is the mortgage affordable if the interest rate increases? Rates are low now, but they will rise – can you afford t3 or 4% higher? Do the sums and factor it into your budget to be sure that you won’t be facing a mortgagee sale if things go pear shaped.
Upgraders
Low rates will bring more buyers and investors into the market and make it easier to sell your current home, and will make your next purchase more affordable.
In addition to the list for first time buyers, upgraders should consider:
- Would it be more affordable to increase your mortgage to finance renovation rather than selling your current home and buying another? Keeping your own home and renovating means no stamp duty or buying and selling costs to pay.
- When interest rates go up, can you afford the bigger mortgage?
- Will there be added costs when you move? For example, are you further from work, your kids school or your social network? Will you be spending more money and time going back to your old neighbourhood?
Investors
Investors are sometimes caught in the trap of making a decision based on the interest rate of the day. When rates go down, more investors often jump in without even considering the pros and cons. If you’re attracted to investing right now because of the low rate environment, it’s important to remember:
Investing in property is a business, not a hobby. Make sure you’re educated and know what you’re getting yourself into!
The rules for buying a home don’t necessarily apply when buying an investment property. The house down the road or that lovely resort apartment should not be considered unless the numbers add up. Investing is a numbers and head game – leave your heart out of it!
When rates go up, you may not be able to raise your rents to cover the increase. Rents and interest rates don’t usually move together – the movement on rent depends on the micro economics of the area where the property is. If you cannot raise rents, you will bear the rate rise alone. You will get an increased tax deduction, but 70% of that interest rate rise must be met by you.
The key for to buying property is planning. Take some time and list the possible risks, and formulate the contingency you will use if they eventuate. Nothing beats a well thought out plan, and where your finances are concerned, being sure you can manage a significant interest rate rise is crucial when it comes to buying an asset like property.
If you’re interested in buying your first home, upgrading or investing, please give me a call. We can run some figures on different loan amounts at different rates so that you know how much you’re comfortable borrowing. I can then arrange the finance, making sure you’re matched with a loan that meets your needs now and in the future.
Love Home Loans aims for 100% client satisfaction. Call us now on 02 8217 9333 or email michael@lovehomeloans.com.au.
