Housing market demands borrower caution
Home-owners and property investors would be wise to remain cautious amid the current uncertain conditions in the housing market. However, shrewd buyers can find some of the best value in the market that's been available for some years.
Here's what we know: Higher interest rates have placed a squeeze on many borrowers with high debt levels. This comes at a time when residential property prices are well passed their peak and are falling in some areas.
Yet most indications are that the housing market has levelled out and prices have returned to more modest growth. The exceptions are the Sydney market and inner-city or high-rise apartments in Brisbane, Sydney and Melbourne.
Official interest rates are steady but the possibility of further rises in 2006 and beyond can't be ruled out. Each 0.25 per cent rise will add about $32 a month to the average $200,000 25-year loan, or $65 a month on a $400,000 loan.
Borrow with common sense
Infochoice also warns consumers they should not rely solely on brokers or lending institutions to determine what borrowing levels are manageable for their individual circumstances. Expansive lending policies among some lenders may see borrowers become over-committed in the current climate.
Don't borrow more than your own common sense suggests is affordable. Remember, the lender is always covered by mortgage insurance and the mortgage over your house – the borrower and homeowner risks everything.
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:
- allow for higher interest rates of up to 1 percentage point 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 very 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 unlikely to pay off in the current market
- 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 – you can't guarantee falling prices won't erode this equity.
- rather than for further spending, use home equity finance to consolidate existing higher-interest debt at the lower home loan rate.
- 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
More: Latest rundown on fixed rates