Overcommitting to a home loan that cannot be repaid is an outcome every home buyer wants to avoid. There are steps to take to ensure a loan is affordable and won’t land you in trouble.
Allowing for higher interest rates is one of the most important of these. Michael Hutton, a partner at HLB Mann Judd, says borrowers should give themselves a buffer of 3 per cent. “The most recent six interest rate rises have been for a total of 1.5 per cent,” Hutton says. “Now, 1.5 per cent on a lot of money is significant but it’s still not that dramatic a rise.
“So all of the rises we’ve had in the last three years … should still be within people’s buffer zone.”
Denis Orrock, general manager of Infochoice, recommends a buffer of 2 per cent. “But don’t set it and forget it. It obviously has to be readjusted. For example, if you got a loan out in 2004 and you set yourself a 2 per cent buffer zone, November would have exhausted it, so you’d need to reset that and start again.”
Noel Whittaker, executive director of Whittaker McNaught, recommends a simple formula in dollar terms to ensure the repayment time frame is manageable and does not lead to excessive interest charges. It is based on an interest rate of 8 per cent – the average home loan rate. “To me you’ve got to make sure you can pay at least $8 per $1000 borrowed each month. That’s $800 for every $100,000 of mortgage,” he says.
Whittaker says this rule produces a reasonable repayment period and leaves room for a subsequent rate rise. More….