New Mortgages and Rising Interest Rates
Use a Loan Calculator and Understand Your Property Repayments
Feb 14, 2009
It's a fantastic opportunity for new home buyers to enter the property market at the moment, although there are a couple of risks to consider in the short-medium term timeframe. Firstly, borrowers should know how much they can afford to repay not only now but also when interest rates rise. Secondly, the risk that in the interim the value of your property may fall should be taken into account if renovations are likely to be required.
Understand what the Repayments are Now...and Later
If variable home loan rates are around 5.5%, the repayments on a 25-year $200,000 home loan are approximately $285 per week. That's fantastic -- for now! But how much can borrowers afford to repay later on if the variable interest rates rise again to more than 8%?
If a borrower can only afford to repay $285 and no more at all, then perhaps a lower sum should be borrowed to allow for increases, because at 8%, the repayments on the same loan would be $355. To keep repayments under the $285 per week up to a level of 8%, the sum borrowed should be less than $160,000.
This is one concept which was ignored by home loan financiers during the years 2003-2007. Borrowers have seen the repercussions of failing to accurately predict the effects of higher interest rates even after central banks and governments openly acknowledged that a 0.25% rate move will have far greater effects on the household sector prior to the 2008 credit crunch.
The cause of failure in the sub prime market starts at the bottom of the chain. The real estate agents and mortgage brokers of the time did not seem to realise just how much people who were less financially savvy than them relied on their somewhat uneducated advice. Predatory lending was rampant due to the motivation of these parties reaping commissions from contracts signed and dealt.
Lower Property Prices Forecast
There is plenty of speculation by central banking authorities, governments and the general public that property prices are likely to fall further in the coming months of 2009, despite what property experts like real estate agents, property developers and anyone else who has a significant financial interest in property say.
All in all, it is a great time to borrow but also a timely reminder of the real causes of the 2008 Financial Crisis which, had all people at contributing levels of the financial chain acted with integrity and sincerity, should never have happened.
On the other hand, borrowers should ensure that that they know how much their repayments will potentially be at all stages of the business cycle, that is when interest rates are low and when they are high, and be able to service that debt.
The life of a home loan is a long-term investment and therefore interest rates should be observed with a long term view. It is pointless succumbing to the selling points of real estate agents and home loan financiers who are using the current low interest rate environment as a hook to snare buyers and borrowers.
So beware of the hard sell on property and loans throughout the next business cycle.
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