Having a strong income and the borrowing capacity does not necessarily mean you are ready to buy a property. There are a number of important factors that need to be considered before refinancing or committing to a new home loan…

FIXED RATE HOME LOAN TERM EXPIRING

If you were lucky enough to fix your home loan at around 2% then you are in for a big surprise when your fixed term contract comes to an end. Be prepared for a significant increase in monthly repayments as the RBA continues to hike up the cash rate since its record low at the beginning of the year.

Let’s put this in perspective. Since May, the RBA increased the cash rate by 2.25%. This means that a $750,000 loan on a 25 year mortgage would have a total monthly repayment increase of about $922.

What can I do? Interest rates vary between lenders. A record number of Australians are refinancing their home loans with non-major lenders. Why? They are currently offering great refinance rates to win over new customers, with little to no loan fees and cashback offers.

RISING INTEREST RATES

Rising interest rates not only increases monthly repayments but reduces your borrowing power.

In October 2021 the Australian Prudential Regulation Authority (APRA) increased the minimum interest rate serviceability buffer from 2.5% to 3%. A buffer rate of 3% means a bank will asses your ability to make repayments at 3% above the current interest rate.

Let’s put this in perspective. If you are looking for a home loan amount of $800,000 and the interest rate is at 2.99%, the monthly repayment is $3,369, but lenders will assess your ability to make monthly repayments of $4,791 on a 5.99% interest rate (inclusive of the 3% buffer rate).

What can I do? Do what you can to increase your borrowing capacity: know your credit score, reduce your debts, reduce excess credit card limits, save more money for your deposit, cut your expenses, etc.

FALL IN PROPERTY PRICES

Nationwide, property prices have fallen 1.6% for the fourth consecutive month in August and Governor of the Reserve Bank of Australia Dr Philip Lowe predicts that prices will continue to fall by 10%.

With falling property prices, refinancing might not be favourable for home owners who purchased a property in the last two years, at the peak of the market (where prices went up by 25%).

Lenders will require an up-to-date property valuation. If you purchased your property at the peak, it is likely that the value of your property has decreased and your loan-to-value ratio (LVR) may be considered high risk.

What can I do? Save as much as you can, aiming for at least 20% on your home loan deposit. Sure, you can still buy a property with a lower amount, but with at least 20% you save on lenders mortgage insurance (LMI) and reduce any LVR risk in the future.