Rising interest rates aren’t the only thing first homebuyers should look out for. Picture: istock
The risk of mortgage stress has become very real for first homebuyers across the country.
Borrowers have been hit with two consecutive rate hikes following the RBA’s decision to increase the cash rate on Tuesday, adding further pain to the “petrol tax” caused by the Middle East conflict.
A RISKY ENVIRONMENT
Founder of Melbourne-based buyers agency Mecca Property Group Abdullah Nouh says soaring oil prices should be taken into account by first homebuyers looking to get into the market.
Soaring petrol prices are putting pressure on households and businesses across the world. Picture: Steve Pohlner
“That puts pressure on the cost of goods and services,” he says. “Logistics go up – everything goes up, so we’re going to be in this high inflation sort of area.
“It’s probably all dependent on how long this war’s going to take, which, if we go by what happened in Iraq – it could be a long time.”
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He says those borrowing with small deposits are particularly at risk of mortgage stress.
“Don’t borrow to your maximum,” he says. “You’ve got to really understand the true cost of owning a property.”
It’s important to factor in not just interest costs, but also principal repayments and holding costs such as insurance, council rates, water rates and a three to six month contingency buffer.
When figuring out your borrowing capacity, consider adding a 5 per cent buffer to all expenses.
ADJUST FOR INFLATION
Founder of Sydney-based mortgage brokerage It’s Simple Finance Joseph Daoud says borrowers can ask their broker for a screenshot of their servicing calculator.
“If you are servicing your loan by only a few dollars, ask if this mortgage is right for you,” he says, adding that inflation is currently outstripping wage growth.
“Your expenses are only going to go up and, with interest rates increasing, you could find yourself in financial hardship,” he says.
Borrowers can adjust their expenses in order to factor in inflation.
“As a general rule, it’s wise to add a 5 per cent buffer to your current monthly living expenses before applying for a loan,” he says. “This helps ensure you’re prepared not only for potential interest rate increases, but also for rising day-to-day living costs.”
Be mindful of the property type and location when buying.
BUY CAREFULLY
It’s also important to consider the types of property and location you are buying in, Nouh says. If you can’t afford to buy a house in the area you want to live in, rentvesting in a more affordable area with good growth prospects is another option. In either case, carefully doing the sums is essential.
“Look at the end goal of what you want to achieve and then reverse engineer what the true holding cost is,” he says. “If that is above what you can do, you may have to reduce the cash that is available and that will impact what you can buy.”
“It comes back to how out of pocket you can be each month – because every property is going to cost you money whether you live in it or rentvest.
“So if you have a number in mind, let’s say that’s $2000, you could actually calculate a yield, the rental income you need to get to that $2000.”
Melbourne buyers agent Abdullah Nouh, founder of Mecca Property Group.
REVISITING RATES
Once you start paying back your loan, it’s a good idea to get a property valuation every six months in case your property has gone up in value, Daoud says. Depending on the policy of the lender, it may be possible to negotiate a lower interest rate as the LVR decreases.
At the time of writing, Daoud says Macquarie offers a 5.59 per cent home loan at an LVR of less than 70. The interest rate on the same loan increases to 5.84 per cent for those borrowing with an LVR of 90 while those with an LVR of 95 face rates of 6.64 per cent.
It’s Simple Finance founder Joseph Daoud. Picture: supplied
THINGS TO CONSIDER
It’s Simple Finance founder Joseph Daoud says it’s helpful to keep the following things in mind when buying your first home.
* Government schemes have limits – If buying through the Australian Government 5 per cent Deposit Scheme you will need to exit the agreement by refinancing if you want to rent out the property. To avoid paying LMI on the new loan, you will likely need to own at least 20 per cent equity. If buying through the 2 per cent deposit Help to Buy Scheme, the government will actually own a 30-40 per cent stake in the property and you will need to pay them out before making it an investment
* Avoid bad credit – Don’t apply for a BNPL facility, credit card or a car loan after your home loan has been approved as these have the potential to place you in financial hardship
* Ask about loan options – Before submitting your loan application, ask your broker or lender what the process is for switching the loan from P+I to Interest only. If applying through a government scheme, you could also ask if the lender will accept boarders income to rent out one of your bedrooms to a friend
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