Assessment Rates, Building a Buffer and a Feeling of Safety

Interest rates are low right now – like historically record low rates. Which is awesome if you’re looking at buying a home. But unlike other countries where you can lock in the same low rate for the life of your loan (yes, it happens!) here in Australia – you’ve either got a variable home loan rate that goes up or down with the market or you can fix for a few years.

Long story short, that 30 year loan you’ve just taken out – isn’t staying at the same low rate you’ve got now for all of your 30 years (or however long it takes you to pay it out).

So – freak out time right? Er”¦ not so much. For three reasons:

  1. You should only ever spend what you’re comfortable with repaying now AND at a higher interest rate. I’m the first to tell everyone that back in my day (insert old lady voice) I was preapproved for $90,000 and yet only spent $31,500 on my first teeny tiny unit (yes, I’m old). Spend what feels comfortable for you now And if interest rates go up – try adding 4% onto the current interest rate and if it makes you prematurely go grey, think good and hard about whether it’s right.
  2. The banks will automatically add this buffer to your repayments when they calculate if you can afford your home loan! That’s right, if the interest rate you’re looking at starts with a 2 or a 3 – doesn’t matter, the bank is likely seeing whether you can afford something 3% higher! It’s called an assessment rate. This gives them some confidence you can make repayments when the rates do rise. But don’t use this as your fall back position, when in doubt – see rule 1, if you don’t feel comfortable, buy cheaper.
  3. When you get your home loan – talk with us about a priority list of what to pay off quickest (we might suggest credit card, personal loan or other nasty debt) but if your home loan is your only debt we’ll likely recommend cracking into that as quickly as possible. If this is your own home that you live in we’ll usually recommend rounding up your repayments to the nearest, ten, hundred or even thousand based on what you can afford – build a buffer, it’ll serve you in the long run.

Kirsty’s just been recorded in an interview with Richard Bailey of Bushby Property Group, outlining APRA’s new changes to lending coming up that will make lending harder soon.

So how do you know what you need to be saving on an ongoing basis? What is the magic number? Have a look at Kirsty’s simple savings blog to see her simple rule of thumb and learn all about ‘propensity’.

Final tip – just like my awesome client Amy today – if the bank write to you to reduce your interest rate DON’T reduce your repayments! What you don’t see you don’t spend. Keep it the same and build up a buffer for when rates go up.