Want to buy a home? Try this strategy

Newspapers love to scare the pants off us and one of their favourite tactics is to use the headline about mortgage stress.

But interestingly, the latest news about this big issue for anyone overborrowed is that mortgage stress has been on the wane.

Why?

Well, historically low interest rates and a good job market might be helping a lot of Aussies who have homes with attached debt.

However, there are still those having a tough time paying off a mortgage, as the following information from Roy Morgan shows.

Stressed number drops

Late last year, the researcher found: “An estimated 584,000 mortgage holders (15.8 per cent) were ‘At Risk’ of ‘mortgage stress’ in the three months to September 2021.”

This was a record low, and followed many Australians being released from lockdowns in NSW, Victoria and the ACT.

A year before, the number was 668,000 or 18.3 per cent, which was nearly one in five home loan borrowers feeling the pinch.

Be prepared

This has to be a warning that if you’re going to be a buyer, please make sure you can cop rising interest rates because they’re coming.

Banking economists think rates will rise by August and we could see four hikes in less than a year.

Bill Evans, chief economist at Westpac, has ‘guessed’ a future for rate rises. He forecasts the cash rate will peak at 1.75 per cent in early 2024, up from previous estimates of a 1.25 per cent peak by the end of 2024.

Build future rate rises into any borrowings

The Reserve Bank’s cash rate of interest drives the variable home loan rate and, given the cash rate is now 0.1 per cent, you should be building into your borrowing a possible rise in interest rates and repayments equal to 1.65 per cent.

So, if you borrow at 3 per cent now, by 2024 you could be paying 4.65 per cent.

$1 million borrowed at 3 per cent means monthly payments of $4,572 for 25 years. If the rate of interest goes to 4.65 per cent, the repayments go to $5,654 a month.

That would be a monthly rise in repayments of $1,082.

Right now, the banks are divided on what will happen to property prices. This is what they’re saying:

CBA expects house prices to rise 7 per cent in 2022, before dropping 10 per cent next year.
ANZ sees a 6 per cent rise this year and a 4 per cent slip in prices in 2023.
NAB tips a 4.9 per cent hike in property values in 2022 and a 4 per cent fall in 2023.
Westpac tips an 8 per cent rise in 2022 and a 5 per cent drop in 2023.

Here’s what I’d do

If I was out of the property market and I wanted to get into it:

First, I’d get my money lined up and make sure I’d get the best and lowest variable rate going. For example, Athena’s 1.89 per cent rate looks one of the best. If it rises by 1.65 per cent, you end up on a rate of 3.54 per cent.

Make sure you can cover repayments if rates get to that level by 2024.

Interestingly the three-year fixed rates have a comparison rate of about 3.5 per cent, so locking in now doesn’t make a lot of sense because you’d conceivably be paying 3.5 per cent for a couple of years when you could start off only paying 1.89 per cent.

That’s my best guess for your money plan.

Now, what about “the buying”?

I wouldn’t be surprised to see house prices rise by a smaller amount this year and fall in some suburbs and towns in both this year and next. An overall rise in national property prices masks the fact that some areas experience price falls.

Find the locations that you found were too expensive and turn up for showings and auctions, remember that the supply of properties on the market is rising. That could give you a chance of finding a bargain.

Also, have a look at nearby cheaper suburbs because there’s often a ripple effect, such as when a suburb gets too hot in price, the neighbouring suburbs increasingly become popular.

And always try to buy the worst house in the best street, provided you’re happy to renovate. It can be a great way to jump a few rungs on the property ladder.