With home loan interest rates remaining at a historical low point, many of our Baldivis clients have been taking advantage by refinancing. Many use the opportunity to “pull” equity out of their homes and many are buying their first investment properties. While we are in favour of using home equity to pay off expensive personal debt such as credit cards and store cards, we also like to caution our clients to be careful not to overextend.
Recently, the RBA warned homeowners about taking on too much debt, stating that they are not likely to lower the interest rate anymore than they have. They realise, as we do, that homeowners are often tempted by lower interest rates to borrow more money than they really need to borrow.
While historically low interest rates are a great bargain, they don’t erase the fact that you are eventually going to have to pay back every dollar that you borrow plus interest. In other words, low interest rates don’t give you carte blanche to borrow more than you can reasonably afford to pay back.
Lenders’ Standards Help Consumers
In the case of potential overborrowing, the standards that lenders employ are helpful to consumers, even if they get “bad news” from time to time. Lenders don’t want you to borrow more than you can pay back because they are less likely to get their money back. When a lender forecloses on a home, they often lose money.
Lenders don’t want you to borrow more money than you can afford to pay back. Consequently, they usually add two percent to the current interest rate and use it to determine your ability to make mortgage repayments. If they find that you would reasonably be able to pay your loan back if the rates were to rise two percent, they will approve your loan. If they don’t think you could handle a two percent rise in interest rates, they will probably turn down your loan.
Other Variables to Consider Before Taking out a Loan
A fixed rate loan isn’t fixed forever. Eventually, it will revert back to whatever the current variable rate is at the time. While you can change lenders or possibly get another fixed rate from the same lender, there is no guarantee that the fixed rate will be as low as your current one.
Your Current Financial State
Can you comfortably repay your loan? If so, you should also make sure the loan has features you may need later, such as redraw facilities or the ability to make extra payments without penalty.
Future Earning Power
If you become ill, will you be able to continue making your payments? If you overextend, it could become a large problem down the road. It’s OK to go after your “dream house,” but buying a reasonable home doesn’t automatically mean you are “settling for less.” Make sure you can afford the home you are planning to buy, even if you hit a few bumps in your financial road later.
Family Growth and other Life Changes
Will you still be able to afford the repayments if you will have two children? What if your career path stalls?
Know exactly what you owe on a monthly basis. Will you be able to keep up with a home loan and your previous debts?
If you are taking out a loan for an investment property, is it in an area poised for capital growth? Will you be able to afford the debt service along with property management and maintenance costs on the property?
Call Smartline Rockingham
Luckily, the home loan experts at Smartline Rockingham can take a look at your finances and help you determine how much you can reasonably borrow. In addition, we can help you find a loan that is perfect for your individual situation.
You deserve a home loan with reasonable rates. You also deserve a home loan with terms that are appropriate for your unique requirements. We can help you find that loan.
Call (08) 9527 1800 today.