Buyers beware the lure of low interest rates: Patrick Bright

GUEST OBSERVATION

Prospective home owners and investors should be careful not to go overboard with the current low interest rate.

Last week the Reserve Bank cut interest rates to a historic low of 2.25% after weeks of speculation.

I encourage home owners to continue to pay off their mortgage with the same or higher repayments in order to build up a buffer to be used in tough times.

Prospective home buyers often get so excited about buying their own place that they forget about evaluating the future.

They base their home loan on their current financial circumstances and don’t take into account their future plans like starting a family or allowing for the fact that rates will rise at some time in the future.

While rates are at historic lows now, it’s important to keep in mind that they won’t stay at these levels for the long term.

There’s no downside to making repayments above your required level as it gives you a safety net in case of difficult financial times or allows you to pay off your mortgage sooner.

In contrast, borrowing to your maximum at this, or any, time is a recipe for disaster.

I recommend people follow my 20-25-20 rule if they want to avoid financial stress where you put down a 20% deposit, ensure no more than 25% of your income is required for repayments and have a term of no longer than 20 years.

Patrick Bright is the founder of Sydney-based buyer’s agency EPS Property Search.

Patrick is the author of four best-selling real estate books known as “The Insider’s Guide to Buying Real Estate Series”.