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Tips regarding buying property in
Australia |
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2. Time for borrowers to batten down (October 2003) |
Home-owners and property investors would be wise to adopt greater financial caution amid the increasingly uncertain climate of escalating house prices, rising interest rates and record borrowing commitments. Rising interest rates risk placing an undue squeeze on many borrowers with high debt levels at a time when residential property prices appear to have reached unsustainable levels in some areas. The Reserve Bank is moving to increase interest rates with more rises almost inevitable in coming months. Each 0.25 per cent rise will add about $30 a month to the average $180,000 25-year loan.
Infochoice also warns consumers they should not rely solely on lending institutions to determine what borrowing levels are manageable for their individual circumstances. Continued expansive lending policies among financial institutions may well turn out to be inappropriate for borrowers given the current climate.
Record levels of both housing and personal debt mean that many borrowers are already having to pay out more of their income in loan repayments than lenders once regarded as the maximum capacity to pay: 30-35 per cent of gross income.
There are, however, a number of simple steps that borrowers can take to avoid placing their biggest investment at
risk:
New borrowers
- Allow for higher interest rates of up to 2 percentage points when
budgeting for repayments over the next few years.
- Maximise your deposit and try to keep your LVR as low as possible, 90 per cent at the most.
- Ensure personal debts like credit cards and car loans are under control before committing to a property loan.
- Buy for the long term, short-term speculation is more risky now than ever.
Existing borrowers
- Make extra repayments where possible to reduce your exposure to higher rates and falling prices.
- Consider switching at least part of your loan to a fixed rate BUT check the flexibility of such loan arrangements. Extra repayments? Early payout penalties?
- Consider carefully further borrowing against the equity built up in your home – can you afford higher repayments if rates are 7 or 8 per cent?
- Rather than for further spending, use home equity finance to consolidate existing higher-interest debt at the lower home loan rate.
Investors
- Lock in tenants for as long a lease as possible, even if it means accepting a lower rent.
- Avoid buying apartments in areas where large amounts of new construction is coming on line.
[source: news.com.au]
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