Given the positive movement in our economic climate, many women are now reconsidering their current financial options. I spoke to Olivia Maragna from Aspire Retire Financial Services about this recently. Olivia has kindly answered 2 pressing questions, particularly for those considering buying into the housing market for the first time:
To buy or rent currently?
Home loans – to fix or not?
Buying v Renting
Buying a house is probably the biggest financial commitment we make in our lives, so it’s not a decision to be taken lightly. Many women dream of a home of their own, however making such a big commitment when you are young can be a tough call to make. On the other hand, when you are older you can look back with relief that you made the investment earlier in your life. Sure, you may have had to do without, but bricks and mortar certainly provide a sense of security.
To buy a house, most women need to borrow money. Although this is important, there is more to buying a house than just money. There are personal and lifestyle goals to consider.
How long do you plan to live in the house? Depending on your circumstance, it might not make much sense to go through the hassles and set-up costs of buying a house if you are only going to be in it a short while. If you buy and sell a house within a short term, there could be a risk of making a financial loss.
What is your comfort zone? Can you really afford the repayments on the loan? Just because you can borrow the money doesn’t mean you have to. Can you live the lifestyle you want and afford the repayments? If travel, starting a family, or committing money to a hobby or sport is important to you, then maybe you should consider a less expensive house and smaller loan. The mortgage is just part of your own financial puzzle, it shouldn’t take over your life.
Should you rent instead? Renting means you only have a week-to-week financial commitment and the flexibility to move on if you want to, with little cost. On the other hand, owning your home can give you security, ownership of an appreciating asset and potential tax-free capital gains when you eventually sell. This is definitely a personal decision nobody can make but you.
How do I get a loan? Applying for a loan can be a harrowing experience. You’ll be asked all sorts of nosey questions – income and savings (or lack thereof), debts (like credit cards) as well as other assets (like shares, managed funds, cars and boats). Be prepared to disclose all, and obviously, always tell the truth.
Ideally, you need a deposit of a least 20% of the value of the house to avoid mortgage insurance (an extra charge to protect the lender, not you, if you default on the loan). Lenders will be more impressed if you saved the deposit because that shows you have financial discipline.
Lenders want to see that you can repay the loan and will look at how much of your income it will take up. They will also be interested in your credit rating – your track record of paying bills on time.
Your house will become collateral for the loan. If you fall behind on the repayments, the lender can repossess the house and sell it. They will take this step only as a last resort but it means you are out on the street. And even worse, it will be very hard to ever borrow money again.
Where do you go to find the best loan? If you decide to buy, this is the next question. Talk to your financial adviser about the options currently available to you. Weigh up the pros and cons and make your decision wisely.
Home loans – to fix or not to fix?
It wasn’t that long ago when interest rates were skyrocketing that most mortgagees were wondering when was the "right time" to fix their interest rate. With so many unknowns facing the economy, it’s now the other way around – with interest rates diving, when will be the "right time" to fix?
Australian women now understand more than ever how the Reserve Bank of Australia uses interest rates to manage the economy. So for any mortgage holder the question of fixing your mortgage interest rate is always a very important one.
Regardless of whether rates are going up or down, before you act, carefully consider both sides – the advantages and disadvantages.
The obvious advantage is that when you fix, repayments will not increase with rising interest rates so you know in advance what your repayments will be for a fixed period, and you can usually choose one to five years. This can be helpful if funds are tight.
But what are the disadvantages? Clearly the biggest is what is happening now – borrowers having to repay at the interest rate they fixed at as they watch the variable rate drop to the lowest levels in 40 years. In addition, the fixed rate is generally higher than the standard variable rate and sometimes set-up fees are charged. Alternatively, if you do take the fixed option and then break the loan before the set period has expired, you will be hit with penalties.
Focus on the average.
Many borrowers will automatically think it’s best to pay a bit extra and tie in to a fixed rate than gamble with potential rate increases. But you should never just compare the fixed rate to the variable rate… it’s the average of the variable rates over the coming three years that is your best indicator.
Unfortunately, nobody will know what the variable rates will be over any lengthy timeframe, but to give an indication based on past results, there have only been three periods since 1990 when fixing for longer than two years has been a positive move. This occurred in 1993/94, in 1998 and in the second half of 2001 (following September 11). Who knows if 2009/2010 will be another of those occasions? Nobody.
So if you’re thinking of changing to a fixed rate, think carefully, do the sums and talk to your financial adviser about your personal situation. Life is about choices and nobody should make this decision for you. The only suggestion we make is to keep paying your mortgage off regularly and making additional payments when you can afford to.
Feel free to call Olivia if you have any questions about your situation or would like some clarity on any of the areas mentioned above. Ph:1300 66 77 02
What are your thoughts?
Are you a home owner? Have you opted to continue renting rather than buy a home? Do you have a fixed or variable mortgage repayment? Was it difficult for you to buy into the market? Do you think real estate is a sound investment?