Caution the key in current housing market

Home owners and property investors would be wise to adopt greater financial caution amid uncertainty in the outlook for property prices and interest rates. Easy lending practices, top-heavy house prices and the possibility of higher interest rates make a case for protecting yourself against the increasing chances of a property downturn. In the current climate, there are a number of simple steps that both prospective buyers and existing borrowers can take to avoid their investment being put at risk:

New borrowers:

  • allow for higher interest rates of up to 1 percentage point when budgeting for repayments over the next two 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 8 per cent?
  • rather than for further spending, use home equity finance to consolidate existing higher-interest debt at the lower home loan rate.