Rates are at historic lows, and many Australians have been taking advantage of this and securing themselves a mortgage with a low rate; while this isn’t a bad idea in itself, the Reserve Bank has suggested that rates are unlikely to be cut any further, and has warned families against taking on too much household debt.
Sometimes, knowing you will be paying less interest on your loan may tempt you to take on more debt than you can handle. Note that even though your repayments are lower, you are still going to be repaying the entire amount you borrowed (plus interest!), so low rates is not a logical argument for borrowing more than you can afford.
Luckily, most lenders will, as a part of assessing your serviceability, look at whether you could still comfortably make repayments even if the rate rose by two per cent. If the amount you want to borrow is too high, you will not be able to pass this test and the lender may choose not to follow through with your loan. The idea of this is to reduce the chance of borrowers biting off more than they can chew.
Although lenders will do the best they can to ensure you will not take on a loan that is beyond your means, there are a few other things you might want to take into account before you take on a sizable mortgage:
- If you have chosen a mortgage with a variable rate, be very aware that the rate could rise, leaving you with higher repayments to make and increasing the amount of interest overall. Fixing your rate is the only way to guarantee that your repayments will stay the same for a period of time. Even then, you cannot stay on the same fixed rate for your entire life of the loan, as your loan will revert to the appropriate variable rate at the end of the fixed term.
- Do your research before rushing into a loan just because of the low rate: Can you afford the repayments? Does the loan have features that you may need later, such as portability, the option to make extra repayments, or redraw facilities?
- Taking on a large loan that will help you acquire that dream house may seem worth the years of debt at first when you have a decent salary, however if you lose your job or become ill and are unable to work, you can end up even further in the red with no means of getting out.
- Consider your changing circumstances. For example, if you’re a couple with two incomes when you purchase the property, consider if you’re going to have children and might only have one income for a period of time. Plus obviously there are significant financial obligations when raising children. With these changing circumstances, will you be able to meet the repayments?
- Consider any other debts you already have, whether they be credit cards or personal loans. Are you going to be able to sustain all of your repayments after taking on another load of debt?
- If you are taking on a large loan to buy an investment property, ensure you invest wisely! Although most metropolitan areas are experiencing a rise in house prices, it doesn’t guarantee that your property will increase in value. If you end up in a great deal of debt and cannot make a profit from your investment, you could find it very difficult to pull yourself out.
The best thing you can do to ensure that you do not take out a loan that you cannot pay back is think long term. If you plan to have children, move to a bigger home, do renovation work, or need to support elderly parents or a new business, then these are all things can have an effect on your income. As long as you do your research beforehand, you and your lender should be able to secure a loan that is within your means.
It can be confusing to know whether to get a variable rate or fixed rate mortgage, and what features are important. That's why it's important to not only check the right rates, but make sure that you're getting the right features in your home loan. Get help choosing the right home loan
Will Keall, iMortgage’s general manager, has a wealth of marketing and business development experience gained in Australia and the United Kingdom. These include high level roles in a range of sectors such as financial services, insurance, travel and tourism, motoring and professional services.
Will played a pivotal role in the successful establishment of iMortgage. His dedication and passion for the mortgage industry have won Will the utmost respect as an integral part of the iMortgage brand.
A self confessed “numbers and brand geek”, Will calls himself a conservative investor with a long-term philosophy. He also believes it’s important to “love where you live.”
Will is a cricket and football tragic, who also enjoys running.