First-home buyers should build a buffer against rate rises

First-home buyers should build a buffer against rate rises

Author: Mark Armstrong
Date: October 12, 2009
Publication: The Sun-Herald

Recent interest rate rise highlights the need for first-home buyers to consider more than just rates to help set up their financial futures.

While it is important for first-home buyers to build in a buffer to take into account interest rate movements, they also need a change in mindset and to start thinking like first-home investors.

This is because your first property is unlikely to be the dream home, so it is essential to consider it as a stepping stone to bigger and better things.

In a worst-case scenario when a first-home buyer is unable to afford to hold their property they must keep an ace up their sleeve — the option of selling the property and realising a profit rather than a loss.

They are then in a position to invest in a different asset class and purchase a home again when affordability returns.

First-home buyers would be wise to steer clear of areas that are dominated by other first-home buyers.

These areas tend to have a greater volatility in unemployment, as indicated by the recent Centre of Full Employment and Equity research compiled by the University of Newcastle.

This means as unemployment grows there is a greater risk of forced sales, thereby increasing supply and putting downward pressure on prices.

Many of these areas also have a high portion of debt relative to the property values.

This increases the chances of slipping into negative equity and selling at a loss if the market turns south.

However, areas that have an even balance of investors and established owner-occupiers tend to be less volatile.

Owner-occupiers who have owned their properties for a number of years will have less debt on their properties and are often in an age bracket where employment is more stable.

In addition, investors are largely insulated from interest rate movements as they have the ability to put up rent and negatively gear any increase.

Thankfully our banking system forces first-home buyers to factor in a 1 to 2 per cent buffer in their serviceability, so a .25 percentage point increase in interest rates is unlikely to break them.

However, it does highlight the need for first-home buyers to consider their short- and long-term requirements, and develop a strategic plan to factor in economic forces out of their control.

Mark Armstrong is a director of Property Planning Australia, www.propertyplanning.com.au.

 

  Top of page  Other articles