Some good news for home buyers this week with a surge in homes listed for sale.
It’s been an anxious 12 months for would-be buyers, feeling as though there simply aren’t enough homes available for sale.
And they’re right. For most of this year, the total number of homes listed for sale has sat a quarter below the 5-year average.
But, in good news for buyers, the trend is changing. New listings in the past month are 20 per cent above the 5-year average and, on the weekend just gone, we saw the highest number of auctions held in one week in Australian history.
That’s not to say anyone should get too carried away. We’ve also seen more people buy a home this year than any previous year in Australia’s history.
This brings me to what is easily the most common question I’m getting at the moment.
Whether the time of year, or just coincidence, I’m seeing a lot of people weighing up whether to buy their own home or upgrade their current one.
Buying our own home is the biggest financial commitment most Aussies make.
It’s the great Australian dream. We all want a little piece of our country to call home, along with the certainty of knowing we won’t have to move if we don’t want to.
It’s also the only way you can make money in Australia (legally) and not pay tax. If you make a profit on the sale of your home, it’s tax free (provided you have lived there for more than 12 months).
I think if you can see yourself staying in one place for at least 5 years, then priority number one should be to buy your own home today. I say 5 years because costs of getting in and out of real estate are high; you’re up for at least 3 per cent on the way in and 3 per cent on the way out.
On a $1 million home that would come to at least $60,000. If you hold the property for less than 5 years it’s a big cost but spread over 5 years it’s not as bad.
The reason buying your home should be priority number one is record low rates.
Interest rates are probably the lowest we will see them for a very long time. That presents an amazing opportunity to pay down debt fast.
Hang with me for this next bit.
Interest rates on the average 30-year owner occupier loan today are 2.4 per cent per annum. That means a $1 million loan has a repayment of $3,900 per month.
The interest portion of that repayment is $2,000, meaning $1,900 is going toward paying back the principal.
That same $1 million loan at an interest rate of, say, 4.4 per cent per annum would increase your repayments to $5,008 per month.
In that scenario, the interest portion of that repayment is $3,667 per month, with just $1,341 going toward paying back the loan.
The reason the principal portions are different is that the repayments are worked out based on the entire 30-year loan. With the same minimum repayment over the lifetime of the loan, the principal portion of the payment will steadily increase over time, while the interest portion will decrease.
If you made the repayments on the higher interest rate loan ($5,008 per month), even though you get the loan at 2.4 per cent today (repayments only $3,900 per month) you will end up paying an extra $20,000 of principal each year, or $60,000 over the next 3 years! The cool part is that you’re only outlaying an extra $1,108 per month ($13,296 per annum) in actual cash.
That’s the opportunity we have today. Interest rates won’t be this low forever, but I think you’re going to see them this low (particularly for owner occupiers) for the next few years.
It’s for this reason that priority number two should be buying an investment property that you convert to your principal place in time.
If you can’t see yourself staying where you are for 5 years but can see yourself staying somewhere else for 5 years, then buy in that ‘somewhere else’ place.
I’d normally advise people to divorce themselves from emotion when choosing an investment property, but these are unique times.
I don’t see property markets going backwards, so you’re not going to be in a worse position than if you held off and bought in a few years’ time. If anything, I think you’re likely to pay less today.
If you can’t see yourself setting up roots anywhere for 5 years, then you should get into the market anyway and buy an investment property. Without the emotion this time.
Reason being is you’ll still get the benefits of low interest rates, and I think we’ll continue to see strong growth in some markets for the next few years.
10 per cent growth on a $500,000 property is $50,000. Most people can’t save anywhere near $50,000 per year and, on a 20 per cent deposit, it’s going to be very good return and much better than you’ll get on cash in the bank (about 1 per cent today).
Finally, remember that when investing you should always go in with a long-term perspective.
Should I fix my rates?
Q – A few weeks ago you answered a question about fixed and variable interest rates. We want to lock in our interest rates for some certainty and also as a way to improve our borrowing capacity. How long should we be fixing our rates for and what rate should we expect?
A – This one isn’t a one size fits all as it will depend on your debt level and loan value ratios.
Generally speaking though, the banks will offer anywhere from 1 to 5 years as a fixed interest rate period. You’ll get a cheaper rate at 1 or 2 years because there’s less uncertainty from the bank’s perspective.
I’d be trying to get a 3-year fixed rate at a minimum. If you’re going to go to all the effort of fixing your rates, 3 years will give you a good amount of certainty.
If you’ve still got debt on your principal place of residence, then interest only will be best (pay off your ‘bad debt’ first).
It could even be worth looking at the 5-year fixed rates on offer. There seems to be a bit of a jump between 2 and 3-year fixed rates, but not much of a jump between 3 and 5-year fixed rates.
Most importantly, shop around. Friends of mine just locked in their investment loans on interest only for 5 years at less than 3 per cent. Most banks are advertising numbers in the high 3’s!
This is where brokers are invaluable, in my opinion.
Good luck!
James Fitzgerald
Author, BULLETPROOF INVESTING
