Constant media speculation about the affect that interest rate rises will have on property markets are way off the mark, according to property investment expert Louise Lucas.
Lucas the CEO and founder of The Property Education Company says while a rise in interest rates does mean owners who do not have a fixed rate will pay more per month, it is something most are equipped to handle.
Particularly those who have recently taken out a mortgage, as many banks are now assessing people’s capacity to repay loans at a much higher rate than the current interest rate, in some instances at about 7%.
“So, you might only be paying 2% but you’re getting assessed (at your capacity to pay) at 7%,” Lucas says.
Lucas says even when interest rates were 17% people were still buying property and property prices were still rising.
“At the end of the eighties, those of my vintage will very much recall paying 17% on mortgages,” she says.
“During that period, when interest rates were in double digits and rising, rising, rising, we still had the most extraordinary property boom in Australia.
“So, the notion that rising interest rates mean property prices will fall is certainly not based on historical precedent.”
Lucas says owners who are nervous about how an interest rate rise may affect them, shouldn’t panic and look at immediately at locking in their mortgage at a fixed rate, as those rates have already increased substantially.
“At the moment fixed rates are well into the 4% plus range, so people who think now, ‘I quickly want to fix my rates’, I think that ship has sailed,” she says.
“I don’t think rates are going to rise quite as desperately as they are alerting us in the media.
“At the moment variable rates, if you’ve got an owner occupier loan or even an investment, they’re in the low 2% range so why would you fix it 4% now? I understand some people just love the peace of mind, but I don’t like paying more. I can’t tell you (what will happen with rates) because I don’t have a crystal ball, but inevitably banks don’t lose on fixed rate loans.”
Lucas says many people are already way ahead on their mortgages because when rates went down, they kept paying the same amount and others are benefiting from having increased their savings during the pandemic which are sitting in offset accounts.
She says one easy thing people can do now to ensure they make the most of their money is to check with their bank if their savings account is offset against their mortgage.
“I know that seems maybe a little basic for those who do it all the time, but there’s plenty of people whose accounts I’ve looked at after many years who thought their loan was offset and it wasn’t because they’d never actually checked it,” she says.
“So, make sure you actually look at what’s getting charged and if it is offset. I don’t think most people out there really understand the power of an offset account in terms of the impact on how much interest they pay and how fast they can pay down a mortgage.”
Offset accounts work best for people who are good with their money and don’t tend to overspend.
Lucas says the best idea is to have your wages paid into the offset account, put your spending on your credit card for the month and then pay that off in full at the end of the month.
“If you are good with your money an offset account can have a major impact, if you are not good with your money, it’s less effective,” she says.
She warns property buyers to keep away from sports bet and Tatts Lotto as well as Afterpay, if they want to pay down their loans quickly.
“Don’t go wasting money on things that, it’s not good for you and it doesn’t help. You won’t get any more satisfaction in the end, whereas you will get great satisfaction having paid off your house.”
Lucas says it is always a matter of getting the combination right for your personal finances and it is worthwhile to speak with someone now about whether to split loans, start paying principal and interest or selling to prepare for future interest rate rises.
