It's a fantastic opportunity for new home buyers to enter the property market at the moment, although there are a couple of risks to consider in the short-medium term timeframe. Firstly, borrowers should know how much they can afford to repay not only now but also when interest rates rise. Secondly, the risk that in the interim the value of your property may fall should be taken into account if renovations are likely to be required.
Understand what the Repayments are Now...and Later
If variable home loan rates are around 5.5%, the repayments on a 25-year $200,000 home loan are approximately $285 per week. That's fantastic -- for now! But how much can borrowers afford to repay later on if the variable interest rates rise again to more than 8%?
If a borrower can only afford to repay $285 and no more at all, then perhaps a lower sum should be borrowed to allow for increases, because at 8%, the repayments on the same loan would be $355. To keep repayments under the $285 per week up to a level of 8%, the sum borrowed should be less than $160,000.
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