For many of our clients, owning or investing in property is part of their financial goal. For some, it might be entering the market for the first time, for others, it might be about purchasing an investment or finally getting around to renovating their home. Either way, we know that having some form of property in your portfolio can be advantageous. However, if you’ve been following the news at all, you’re most likely aware of the current market situation. The property market, particularly in major cities including Sydney and Melbourne, has slowed right down. Lending has tightened significantly and it’s getting harder to get a mortgage. Banks are scrutinising borrowers like never before, forcing them to jump through proverbial hoops just to get approved. And of course, a bombshell, the report from the Banking Royal Commission was released earlier this month, which has left the gate wide open.
But despite all the uncertainty and murkiness, you can still keep moving forward – you can look at refinancing, topping up your mortgage or applying for a new one and, yes, there are still opportunities. You just have to be smart – smart with your choices and smart with your money. If you’re ready to make your next financial move, here are five crucial things to consider before doing so.
1. Get clear on your current expenses
As I mentioned earlier, lending is tightening and banks are whipping out the magnifying glass on their customers. So before applying for a mortgage, it’s imperative that you do the same and review your current expenses. Look closely at your spending habits. Are there any unnecessary expenses or areas you can cut back on? Any AfterPay expenses or credit card debts will be a big disadvantage. Essentially, when presenting your case to a lender, you want to showcase your financial position in the best light possible. Aside from getting a grip on your spending, this exercise will help you determine the surplus you have available to borrow and pay back realistically.
2. Consider new additions in the pipeline
Before making any drastic financial decisions, it’s important to think about the future. Can you foresee any significant changes to your circumstances? If you’re coming to the latter end of your career, and retirement is on the cards, will you stop receiving a regular income? If you’re a younger couple, starting a family might be in your five-year plan. There could be a drop in income when taking paternity leave, which could affect your mortgage repayments and, considering the average cost of raising a child up until seventeen in close to $300,000, this is worth factoring into your decision making.
3. Stress test your calculations
The Reserve Bank of Australia’s cash rate has been sitting at 1.5% for quite some time now and mortgage interest rates in general are at record lows. However, that doesn’t mean you kick back, relax and rest on your laurels. Change is inevitable and can happen at any time. If you have a mortgage and interest rates went up by even half a per cent, would you be able to handle the repayments? Currently, more than a million Australians are experiencing mortgage stress. How much would you have to shift your spending to cover the costs? There’s a range of mortgage calculators out there that might give you the illusion that everything is in check financially. However, not many of them have the option of stress testing. It’s never fun facing the ‘worse case scenario’, but if you want to be smart with your money, calculate repayments if you were to be faced with an unexpected interest rate hike (1-2% would be wise).
4. Get a pre-approval before you start looking
Pre-approvals are a smart move. Trust me. Not only do they give you a clear picture of what you can afford prior to the pesky credit check, but if your application ticks all the boxes, your pre-approval can make settling significantly quicker. Think of it this way: if you have a pre-approval, you’re a few steps ahead than most when it comes to getting a home loan. If you’re on the hunt for a bargain, you’ll speed up the process and exchange contracts before others in the market.. However, it’s important to note that interest rates can affect your pre-approval. As mentioned earlier, there’s always a chance that interest rates could change, especially if the Reserve Bank of Australia decides to alter the cash rate. If rates increase, it means the maximum amount you’ve been pre-approved to borrow could drop.
5. Seek professional advice
As always, if you’re unsure, speak to someone that knows the financial and property industry. At Talem Wealth, we’re a team of professionals that live and breathe this space and are always on hand to help. Our point of difference is that we spend time understanding your life goals and what you want to achieve from your financial plan. We then put in place credible strategies and measurable steps to get you there. Talk to us today.