First home buyer warning: watch your borrowing budgets

First home buyers are being warned to watch their borrowing budgets when applying for a home loan, following new data showing a rise in property prices last month.

The RP Data-Rismark Daily Home Value Index, released on Monday (July 2, 2012), found six out of eight cities across Australia increased in property values compared to May 2012.

Hobart saw the biggest month-on-month growth with a 2.73 percent increase, followed by Canberra which saw a rise of 2.04 percent. Sydney and Melbourne rose at almost the same level at 1.04 percent and 1.03 percent respectively.

Adelaide and Darwin were the only cities in the report that decreased in property values, by 1.09 percent and 0.75 percent respectively.

Michelle Hutchison, Spokesperson for RateCity, says lower interest rates have given home buyers stronger borrowing power, which could be inflating property prices.

“There’s no doubt that the recent rate cuts in May and June will help restore some confidence back into the property market,” she said. “The RP Data-Rismark results could indicate that some borrowers have relaxed their budgets and purchased properties above market expectations as lower rates mean bigger spending capacities.”

Ms Hutchison said that the Reserve Bank has cut the cash rate by 75 basis points this year, which has opened the door for more first home buyers to enter the property market.

“According to RateCity’s database, the average standard variable rate is currently 6.38 percent but most borrowers should be able to achieve a rate below 6 percent. We haven’t seen rates this low for two years, which has given many prospective home buyers an opportunity to enter the property market where they may have not been able to afford it last year.

“Another problem with lower interest rates means there is a false sense of affordability for some borrowers because rates are likely to rise again. What this means is some borrowers may find themselves able to afford a bigger mortgage with a lower rate.

“For instance, it would cost almost the same in monthly repayments for a $400,000 home loan at 6.50 percent compared to a $440,000 home loan at 5.75 percent.”

Ms Hutchison’s tips on how to avoid over-stretching your borrowing budget:

• Be disciplined: set yourself a budget and stick to it
• Use a credible home loan calculator to plan your budget and ensure your mortgage repayments don’t exceed 30 percent of your income
• Keep a buffer of at least 2 percent to prepare for rising interest rates, which is about $400 per month for a $300,000 home loan.

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