What homebuyers should look for when comparing home loans as interest rates remain low
It’s a great time to buy property with record-low interest rates, but homebuyers are cautioned to avoid these mistakes when shopping for loans.
With unprecedented cuts to Aussie home loans and ultra-low interest rates, now could be the ideal time to buy, but buyers have been warned to shop around before committing to a mortgage.
Canstar’s group executive of financial services Steve Mickenbecker told news.com.au that homebuyers should not be getting a loan for anything around the 3 per cent mark or above.
He said home loan rates are down at around 2 per cent – an ultimate low we haven’t seen before – and buyers shouldn’t be going any higher.
“We’ve not seen a minimum anywhere around that. In 2015, the average interest rate was around 5 per cent and in 2020 the national average was 3.32 per cent. That’s a huge difference in your buying power,” he said.
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According to comparison site Canstar, there were 6777 cuts to home loans over the past 12 months, with an average cut of 0.3 per cent.
In January 2020, the average variable rate for owner occupiers paying principal and interest was 3.73 per cent, compared to today’s rate of 3.32 per cent.
The lowest variable rate was 2.69 per cent and it is now around 1.99 per cent or as low as 1.77 per cent, depending on the lender.
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‘YOU SHOULD BE LOOKING IN THE 2S’
Mr Mickenbecker said there are “a whole bunch of loans around 2 per cent” and was adamant that homebuyers and homeowners should not be paying any more than that rate.
“You should be looking in the 2s and you shouldn’t be paying in the 3s,” he said.
For those who already own a home, Mr Mickenbecker said mortgage holders should absolutely not be paying in the 3 per cent range. “They’re old rates. The average rate is 3.37 per cent, that’s way more than people need to be paying now. It makes such a huge difference over the life of your loan,” he said.
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FIXED VS VARIABLE?
While many home loans in the 2 per cent range are fixed rates, Mr Mickenbecker said with low rates like this, it isn’t really a risk to lock in a fixed rate.
“When rates are low, the risk diminishes getting caught in a fixed rate,” Mr Mickenbecker said.
“The rates going lower is a possibility, but is it a risk if you can afford repayments at that level?” he questioned.
Mr Mickenbecker suggested homebuyers could split the loan into fixed and variable to take advantage of the low fixed rates and added there is no harm with going with a lesser-known lender if the rate is good.
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“The big banks have a level of convenience and they have brands so you feel they are trusted but smaller lenders have been around for a long time writing lots of loans so there’s nothing wrong with those,” he said.
The lowest variable home loan rate at the moment at 1.77 per cent is with one of these smaller lenders, Reduce Home Loans, but you might need around 40 per cent equity to get approval for a rate this low.
“If you want a 2 per cent loan with a big bank you will be going with a fixed-rate loan. With a smaller lender you will potentially get a smaller rate with variable,” he said.
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DON’T OVERSTRETCH
While buyers are now in a position to be able to borrow more, Mr Mickenbecker cautioned to not overstretch when taking out a mortgage and to make sure they can afford the repayments to avoid going into negative gearing.
“It’s a mega increase in the level of borrowing power that people can afford,” he said.
“Let’s say you could afford to borrow $500,000 five years ago and now you can afford $650,000. If rates do go up – and interest rates will go up eventually, there is no question – your repayments will increase. Don’t stretch yourself ridiculously,” he said.
“Look for a reasonable property where you aren’t gearing yourself up to the eyeballs. You don’t want to put yourself in a position where you could end up with negative gearing on a property.”
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Other than shopping for a competitive rate, Mr Mickenbecker added that it’s advisable to find a home loan that offers a full offset option – which allows you to “offset” any savings you have against your mortgage interest – and to ensure there is a degree of flexibility that would allow you to make extra repayments if you wanted to.
He added that buyers should be wary of very low deposit loans.
IS NOW THE TIME TO BUY?
When news.com.au asked REA Group chief economist Nerida Conisbee if 2021 is a good time to buy property, she left a very resounding “yes”.
“Interest rates are very low and it’s getting easier to get finance so from that perspective it’s a good time to buy,” she said.
Ms Conisbee added buyers should be aware of increasing property prices and to keep an eye on interest rates which are likely to fluctuate in the future.
“Interest rates could go up and prices are moving pretty quickly in most parts of Australia. The recession has not put a dampener on it,” she said.
However, Ms Conisbee is confident that interest rates will remain very low in 2021. “It is unlikely we will see a dramatic rise in interest rates,” she said.
Her words of caution go out to investors looking to buy rentals. “One thing to watch out for if you’re investing is the rental market is still pretty low,” Ms Conisbee said.
‘DO YOUR HOMEWORK’
Even though house prices are climbing, Mr Mickenbecker said that buyers are “well ahead of housing prices”, indicating that homebuyers are able to borrow more compared to how much prices have increased.
Compared to five years ago, he said homebuyers are able to afford to borrow an extra $180,000 on average while prices have gone up by around $100,000.
Mr Mickenbecker added that home prices have been going up since the last quarter of 2020, but cautioned first homebuyers not to panic or jump into the market out of fear of missing out if prices start to fall.
He advises to “do your homework”, adding that buyers “should be getting themselves ready to go”, whether they’re ready to buy a home now or not yet.
“Know where you want to live, speak to lenders and get a pre-approval to give you a good indication that you’re good to go. Be ready to go and keep your eye on the market. If the prices do correct and you say now is the time, you’re good to go,” he said.