Should I upgrade, refinance, or both while rates are low?
Right now, the property market is booming! Homeowners are getting some great returns when it comes to selling their properties, and there are also some good options to be found for those looking to upgrade to a larger or more valuable home.
But with a booming market comes competition. While you may be lucky to achieve your desired price when selling, with the large volume of upgraders ready to invest in a new home, it may be difficult to nab your dream home at a bargain price…or even nab it at all!
NSW President of Real Estate Institute, Leanne Pilkington says ” We’ve got a couple of years of suppressed demand happening right now. Eventually, that demand is going to start to ease off, but even if the clearance rates are down in the mid-70s, it’s still a really strong market.”
As we know, when house prices increase, so too does the gap between the value of your current property and the home upgrade you’ve had your eye on. And the further that gap grows, the more difficult it is for you to purchase that next property.
Additionally, when prices rise, so too do the number of upgraders deciding to buy before selling their current property. It seems that when the prices rise, homeowners are more confident they’ll achieve a strong result selling their home, and therefore prefer to sell quickly after buying rather than rushing to find a home after selling.
This is where the homeowners’ trifecta of moneymaking comes into play:
1. Refinance your current mortgage to a lower interest rate
2. Buy before you sell so you have your next home sorted
3. Sell your current home for top dollar and win, win, win!
It’s a process that makes sense. Many homeowners in this position reap the financial rewards of their leap of faith, and enjoy the lifestyle benefits offered by their new home upgrade.
As Economist Stephen Koukoulas says, “history shows over a long period of time, getting a bigger, better quality property in a better location does pay off in terms of the house price gains.” So let’s take a gander at that in more detail.
So, what’s the deal with interest rates?
A major consideration when looking to buy or sell your home are interest rates. With the Reserve Bank of Australia committing to a three-year government bond yield at 0.1%, Koukoulas predicts that homeowners can expect the low interest rates currently fuelling rising property prices to increase by 2024.
David Hyman – Director of Domain Home Loans and Lendi Co-Founder says, “the RBA has indicated the official cash rate will remain low for some time. However, the economy is performing better than many expected, which could impact the outlook for rates if sustained.”
Homeowners should also be reminded that banks can raise the rates they charge out of cycle and at a whim. Hyman says, “record-low rates won’t last forever, and we are already seeing some lenders raising rates.”
Hmm, what’s a homeowner to do?
Go on and reap the benefits now
Koukoulas advises that new buyers and next homeowners alike are encouraged to take advantage of the low rates now to best prepare for the future.
When the time comes that we enter into another interest rate tightening cycle, we will see interest rates increase by one or two per cent, and that could have a damning impact on your monthly repayments.
“If you’ve got your foot in the door or you’re upgrading, enjoy these low interest rates and use this opportunity to try and reduce some of your debt,” Koukoulas states.
If you’re a borrower who is sick of paying out-dated interest rates, now is the time to shop around as lowering your mortgage repayments and refinancing can pay off – even with an upgrade on the cards!
Homeowners who are in a secure financial situation but aren’t planning on moving could consider fixing part of their loan, with rates below 2% available. Hyman suggests “if you want to fix part of your loan, make sure you’ve negotiated the best variable rate possible first because once you’re fixed, you won’t have the same bargaining power on that variable component”.
So folks, if you’re a borrower choosing to fix part of your loan, the experts recommend anticipating potential rate increases that may occur during their fixed term – otherwise you risk detriment when it comes to your finances, if and when the rates rise again.
With interest rates in mind, think about the homeowners’ moneymaking trifecta and start planning with your future in mind.