Mistakes property buyers make when interest rates are low

Interest rates are very low and real estate prices are on the way down, which can only mean one thing – it’s possibly a great time to buy property. But before you dive in, be careful that you’re not making one of these three common mistakes that many buyers make when interest rates are this irresistibly low.

Mistake #1 – Numbers not stacking up

When you’re evaluating a potential property deal, you should look carefully at the numbers to make sure it achieves your goals.

For instance, let’s say you’re looking for a positively geared investment – in this instance, you would work out all of the costs of owning the property to make sure that the rental income exceeds the costs even when the interest rate goes up by say, 2 percent.

When you can get a mortgage at just 3 percent, there’s a good chance the deal will be positive or at least neutral, once tax deductions and benefits like depreciation are taken into consideration. However, if your rate increases to 5 percent and you crunch the numbers, the deal may or may not stack up.

And this is where buyers can run into trouble. Low interest rates can actually make a fairly average property seem like a great deal. This can leave you in a world of pain when interest rates do eventually increase, if your positively geared property suddenly starts costing you money each week.

Of course, if low interest rates have helped you to secure a capital growth property then when interest rates can and do increase, your property will ideally have grown in value and the positive cash flow will be your secondary benefit.

My advice is to use low interest rates as an opportunity to secure a growth property knowing that it is underpinned by the right fundamentals to grow in value and keep you at a neutral perspective, if and when rents increase.

Also, calculate your figures-based interest rate being 2 percent greater than any lender quoted rates to ensure the property still works for you at a higher rate, so you don’t accidentally invest in a dud property.

Mistake #2 – Getting locked in

There are some incredible fixed rate mortgage offers on the market right now, with some two-year rates under the 2.5 percent mark. These mortgages represent incredible value, but that’s only the case if you plan to hold the property for the foreseeable future.

The problem for some property buyers is that low fixed rate offers are often so tempting, they hurry to fix part or all of their loans, without thinking about the consequences should they want to break the loan. Not only you are likely to incur a loan break fee, there are also other things to consider.

For instance, what if you want to pay more than the minimum mortgage repayment each month but your fixed loans don’t allow additional payments? What is this costing you over the life of you loan?

Let’s look at an example, you’re borrowing a $500k loan over 30 years. For fixed loan option, the best 2year fixed rate you were offered was 2.3% with the ongoing rate of 2.8%. The second option is to take the variable loan from day 1 at 2.8% with the aim of making an additional repayment of $1,000 per month into your home loan.

Under option one, your total interest payable over the life of the 30year loan would be $233,872 and under option 2, the total interest payable is $162,987. This translates to you paying your home loan out 8 years before option 1 and just by having the ability to make extra repayments.

Some brokers and branch staff are quick to sell borrowers fixed rates, reasons for this can include brokers wanting to secure their income, borrowers find fixed rates are far more attractive than the lenders variable rates and lenders taking advantage of some borrowers set and forget mindset.

Remember, the decision to fix should be yours alone to make, check the loan features and do your numbers before locking yourself into a fixed loan.

Mistake #3 – Fear of missing out

With property prices, especially in Sydney and Melbourne on the decline and borrowers experiencing reasonable affordability due to low interest rates. Some property buyers are getting anxious that if they don’t buy something now, they may never be able to.

Here’s the thing, though – rushing into anything is never a good idea, especially if that thing happens to be the purchase of an asset worth hundreds of thousands of dollars! There will always be more properties, more deals and more opportunities, so don’t go skipping essential research and number-crunching, or you may rush into something you regret down the track.

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This article via Which Investment does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.