Property in 2011 – a year of caution?
The very latest Homeloans market research has revealed that first home buyers, existing homeowners and investors will be taking a cautious approach to property purchasing into 2011, as concerns about finances continue to keep us all on our toes.
In fact, according to the Homeloans Home Buyer Barometer, which last month surveyed 2000 Australian homeowners and homebuyers, rising interest rates pose the greatest financial concern for 2011, followed closely by the rising cost of living. And as a result, almost half (45%) of all potential home buyers have already delayed plans to purchase a property in 2011. Only 6% of those who have delayed buying a property are planning to do so within the next six months and 56% have reconsidered how much they are able to spend.
So is it right for homebuyers to be so cautious when it comes to purchasing a new property into 2011? Homeloans national marketing manager, Will Keall, says that the uncertainty facing consumers when making a major investment such as property, always justifies the need to exercise caution.
“Mortgage repayments devour a considerable portion of household income, and the risk of such repayments becoming unaffordable, whether it be due to rising interest rates, an increase in other living expenses or other factors, is something that all borrowers must consider,” he says.
According to Keall, responsible lenders will always factor in a provision for increases in interest rates and other living expenses when assessing a loan application.
“This has been the cornerstone of Homeloans’ lending policy for many years, and now the new National Consumer Credit Protection (NCCP) legislation is encouraging other lenders to do the same.”
Market volatility a key factor
There’s also another factor Keall believes is at least partly caused by, but also contributes to consumer reluctance to acquire property - the instability of property prices. Although a recent piece of research by Canadian Scotia Economics shows Australia leading the world’s advanced economies in housing price inflation, we are experiencing volatility in many parts of the nation.
“The concerning outlook that consumers have about increasing rates and cost of living is likely to be a significant factor in this house pricing volatility, and yet it is this very volatility that is also contributing to reluctance to purchase property – so to an extent it is a self-perpetuating problem,” Keall says.
“However a strengthening of our economy and a natural market correction as investors seek to capitalise on more affordable property prices could well see this turn around in 2011.”
To fix or not to fix
Those who are looking to invest this year may wish to allow for an increase in interest rates, by either fixing the interest rate on either part or all of the loan, or by factoring in a provision for a rate rise.
By fixing your rate, you will likely be paying a rate that is higher than the standard variable rate at the time of purchase, but a least you are protected from any increases to the variable rate during the fixed rate period. The down side is that should interest rates fall, you may be locked into a period of paying a higher rate than you would if you were on a variable rate, but at least you are protected from excessive rate rises should they occur. Many people look at a fixed rate as a type of insurance policy – you might pay a bit more for it but at least you have peace of mind.
For those on a variable rate, many consider it a good idea to factor in a provision for rate increases. If your loan allows you to make extra repayments, then make repayments as if the interest rate was, for example, half a per cent higher than it actually is.
This serves a number of benefits:
- You will be decreasing the principal amount at a faster rate and thus reducing interest charges and the period it will take to repay your loan
- You will be ‘getting ahead’ on your repayments, so that if for whatever reason you were unable to make part or all of your repayments for a period of time you may have made enough repayments to cover you during this period
- If interest rates do increase by an amount less than or equal to the extra amount you were already paying, you won’t need to change your day-to-day budget.
For those that do decide to invest in 2011, if you happen to run into any difficulties in making repayments, Keall suggests the best advice is to be up front with your lender.
“A good lender will assist you through the process – whether it be through refinancing your loan or providing you with assistance through the lender’s hardship management process.”