Buying a property can be a daunting decision to make, but with a bit of risk management you can still realise the dream of owning your own home with a little less to worry about.
According to some pundits, Australia is in the grip of a property bubble and it’s responsible for driving up house prices and adding to the affordability crisis. Depending on who you believe, the bubble could burst as early as spring this year.
Others are not convinced, and think the endless talk of a bubble and the likelihood of a sudden drop in prices is evidence that commentators just don’t understand how the Australian property market works.
Regardless of who’s right, it makes for uncertain times if you’re thinking of buying a property. Aussie investigate some potential risks for home buyers, and the practical steps you can take to mitigate those risks.
Risk: Mortgage Rate Rises
The Reserve Bank of Australia (RBA) has kept the cash rate on hold for nine months in a row. But that hasn’t stopped the big banks continuing to make ‘out of cycle’ increases in mortgage rates.
With the financial regulator APRA predicting further increases hot on the heels of the latest round of rises, interest rate increases may pose a risk to mortgage stability.
If a sudden increase in your monthly mortgage repayment would put a strain on your cashflow then it might be worth switching to a fixed interest loan.
Fixed interest loan terms are usually 1,3 or 5 years and you won’t be affected by interest rate rises for that period, which makes budgeting easier. If the rate drops you won’t benefit, but if managing cashflow is your priority then this could be a good option.
If you’re less keen to sacrifice the flexibility of a variable home loan you could build in protection by borrowing less. Buying a smaller investment property while you rent can let you build equity to use on a bigger place down the track, and still leave wiggle room for any unexpected interest rate rises.
Find out more about investing in property while you rent elsewhere.
Loss of Earnings
Risk: Redundancy or Unemployment
Unemployment in Australia has been hovering at just under 6 percent in recent months, but job loss is still a reality for some, and for regional areas dependent on one or two large employers the risk of redundancy is a threat to earnings.
It’s a reality that Aussie broker Brent Plant has seen first-hand in his home town of Burnie in North West Tasmania.
“Burnie located on the North West of Tasmania was affected about 18 months ago when a large employer closed their major operation and transferred most of their business overseas. It affected about 1500 people,” he says.
Some of Brent’s clients were lucky enough to have opted for an Aussie Mortgage Protection Plan (MPP). This not only protects against death/terminal illness and diagnosis of certain medical conditions, but also protects you if you become involuntarily unemployed in the first 5 years of your policy.
“I recall one customer who was able to bridge the gap in mortgage repayments between being made redundant and starting a new role thanks to the payout” he says.
Not everyone opts for an MPP at the outset, says Brent; some see the benefit straight away, others like to take their time to digest and understand things.
“I’ve been on both sides of the fence,” he says. “I have witnessed where a customer has benefited from a payout and also where someone called me to double check they had taken out the policy because they now needed it, only to be disappointed when they found out they had declined it when it was offered. From this experience, I realised I know which side of the fence I prefer to be.” A standalone income protection insurance policy is also an option and will cover a percentage of your income if you’re unable to work due to injury or illness, but they generally don’t cover unemployment from redundancy.
Mortgage protection insurance can help cover mortgage repayments in the event you can’t pay, but isn’t designed to make up the overall shortfall in income from unemployment.
If you’re struggling to pay your mortgage talk to your lender about repayment options.
“Lenders understand hardship … and there are generally circumstances where a customer and a bank can come to an arrangement”, says Brent.
Falling Property Values
Risk: Negative Equity
If the Australian property bubble does burst this year it could mean a downturn in property values that will leave some home owners owing more than their property is worth, known as negative equity. For this reason, it’s smart to consider future-proofing your mortgage.
Work on increasing the equity in your home by adding a little more to your monthly or fortnightly repayment, then if values do drop you won’t end up owing more than your house is worth. Not only will you pay the loan down more quickly but the total interest you pay will also be lower.
If you’re not planning to move for the next few years then you can probably ride out a downturn but if you’re thinking of trading up it could be worth selling sooner rather than later, to take advantage of higher prices.
But what does the market predict?
Property analysts have reported a bit of a slowdown in the housing market in the last couple of months, and they predict it will continue to cool into 2018.
Of course, predictions can be wrong but planning for uncertainty remains the smart move for any potential home buyer, starting with getting the help and advice on the market.
How can a broker help me?
It’s worth chatting to a broker sooner rather than later. They can help, even if you’re not in a position to buy today.
“We help customers plan then follow up every month or two with either a quick call or email”, says Brent, “we’ve been successful in terms of nurturing our customers where, from nowhere to 6-12 months later they’re able to purchase their first home”, says Brent.
“We capture all of their financial and personal information and that lets us offer the right option for them based on a total understanding of their facts and figures”, he says.
It’s called relationship building and it’s at the heart of how Aussie brokers do business.
Start a relationship with your Aussie broker today, and let them guide you through the uncertainty to secure the home of your dreams sooner rather than later.