Property is a hot topic at the moment and it’s certainly at the forefront of many of our clients’ minds, especially with signs of possible rate rises following the Australian Prudential Regulation Authority’s (APRA) recent tightening of the credit serviceability policy. We’ve definitely seen an increase in interest and lately we have been working with our clients to obtain finance for new purchases as well as pre-approvals for auctions – although more often than not our clients are calling us after the auction to tell us they missed out by a long shot!
Sometimes it can be daunting to tie so much of your net wealth up in the home you live in, but there are a few key reasons why it isn’t all that bad – in fact, we often encourage our clients to aspire for a high value primary residence.
- Being able to obtain a high degree of leverage and accessing tax free capital growth makes it attractive.
- It’s a good base for future wealth creation strategies. A strategy we often deploy is to use available equity in the property (once its paid down a little) to then purchase investments such as shares or other property.
- Last but not least – you’ve worked hard to earn your money so why not enjoy it!
Yes! the market is hot, but there might still be compelling reasons for you to buy. Ask yourself, why am I buying the home? Am I buying this for the long-term? Do I believe what I am paying is appropriate and it will hold its value and increase over time?
Then plan for risks ahead. The biggest loss (assuming your house is insured if it burns down) will arise from being forced to sell your home if you can’t afford the loan. Protect yourself with a contingency plan. The biggest risks are usually job related and cash flow. Regardless of the cost of the house, your job security risk will be the same. So, focusing on the interest rates, ensure you have sufficient buffer built up in the loan or offset account to be able to draw on should you need help paying higher interest rates. Even if you lose your job, a few months equivalent interest payments saved into your loan will give you some time to prepare for sale or find another job. I suggest making additional repayments above the minimum while you can, to build this buffer as soon as possible. This will also help you ensure your lifestyle expenses already allow for a higher interest rate.
Have a read on the APRA website about its minimum interest rate buffer predicted at the start of the month.
If you’d like advice on property investment in the current market, feel free to contact Chris Smith or one of his team.