Purchasing property can seem like a scary prospect at the moment with higher interest rates and elevated building costs the talk of the town. Luckily, we are here to ease the burden and let you know you’re not facing these challenges alone.
In a dynamic housing market, you may find yourself asking what you can do to ensure you are finance secure and ready for the big purchase.
Here are some tips on what buyers should consider when financing a new home.
Know the market.
By now, we’re all very familiar with the Reserve Bank meeting on the first Tuesday of every month to decide if there will be another increase to the official cash rate.
Bank interest rates are determined by the Reserve Bank and are set as a means to control inflation, which the Reserve Bank likes to sit around 2-3%. The current climate of high inflation has led to the Reserve Bank continuously increasing the cash rate over the past year to curb consumer spending.
With the current marker of inflation at 7% (May 2023), the RBA board has stated future increases remain likely as it is expected to take some time before inflation falls back within its preferred range.
Higher interest rates impact purchasing property in a few ways, with the biggest impact to purchasers being an impact on their borrowing capacity, decreasing their overall budget and purchasing power.
What is stress testing?
When seeking preapproval from a bank for a mortgage, the bank will simulate different scenarios to ensure the borrower is able to continue to make their mortgage payments in case there is financial turmoil, the interest rates go up, or any other event that befalls the borrower that could potentially decrease their purchasing power. Stress testing is commonplace, but as interest rates rise, the stress testing becomes more severe leaving many with the inability to secure a loan at all.
At times, some banks will lend up to 95% and sometimes even 100% against the security of another residential property. At periods of high inflation, borrowers are unlikely to pass stress tests with only a steady job and little capital behind them.
The Australian Prudential Regulation Authority (APRA) has also recently tightened lending rules, reducing the maximum amount Australians can borrow from the bank to buy a property.
How to negotiate a lower interest rate?
Negotiating a lower interest rate is less about your skill in the art of persuasion and more a reflection of diligent saving and healthy financial habits.
A bank will look more favourably upon you the fewer commitments you have. This involves consolidating debt by looking at your subscription services, reducing the number of credit cards and Buy Now, Pay Later schemes.
To the bank, the less money you can live on monthly to support yourself, the more money you’ll have to surpass stress tests.
Banks will review a minimum of 3 months of living expenses to ensure you can comfortably meet your mortgage payment, so, start practicing those healthy habits now.
A common oversight of many firs time home buyers is the effect a constant income and residence can have on borrowing capacity. Recent Australian data confirmed that the labour market remains very tight, with the unemployment rate at a near 50-year low. From the outlook, this can appear like a savvy time to change jobs, however regular or a recent change of employment as well as a residence may be considered unstable from a lender’s perspective and can negatively impact your eligibility for a home loan – even if your new job was offering more money!
The actual costs of buying a house
If you are a first-time buyer, knowing the full cost of buying is essential to avoid any nasty surprises. It’s more than saving a 20% deposit which is the common catch phrase. Beyond the down payment on the land and the build, there are extra expenses to consider when buying a home, including stamp duty, conveyancing fees and council rates.
It is important to take these associated costs into consideration to help ensure you have a more accurate understanding of your purchasing power and you are searching for suitable house and land packages.
What does a mortgage broker do?
Using a mortgage broker can be a great asset to the home-buying process, providing insight into the different types of loans available and their features.
When purchasing house and land, lenders will typically offer Variable Rates during the land purchase and construction phase, allowing you to Fix the Rate upon construction completion.
> Variable Rates offer flexibility regarding repayments and allow fee-free access to additional loan repayments. However, the applicable rate is exposed to the market rate and Reserve Bank, potentially leading to increased repayments you may not have budgeted for or have any control over. On the other hand, in a reducing rate market, your mortgage payment can decrease.
> Fixed Rates guarantee peace-of-mind with a fixed mortgage payment for the agreed term period. Although, there are restrictions on additional repayments that can be made, access to additional repayments is usually not allowed and may not be eligible for a home loan with an offset account.
Enlisting the help of a mortgage broker will run you through the pros and cons with either option, helping you to consider all the features and benefits to make an informed decision.
We have teamed up with a highly experienced mortgage broker – Bill Jara, a Senior Lending Manager at Loan Studio who specialises in residential mortgages. He can assist you and answer your questions about how construction loans work and how you can finance your new home.
Want to chat to a member of our team? Our friendly sales team are always happy to help answer any queries you may have.
If you wish to speak to our sales team, please feel free to reach out on either of the following methods:
Phone: 1300 888 182
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