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Rate rise drives first home buyers out

Rate rise drives first home buyers out

Jack Han investigates the uncertain era for first home buyers.

November 2, 2009

The future for first home buyers remains uncertain, with more and more exiting the home loan market every month. And now as interest rates rise, and government grants are reduced, their triumphant return is more unlikely than ever.

The number of first time home buyers as a percentage of all home buyers dropped for the third consecutive month, from 28.5 percent in May to 24.7 percent in August, according to the Australian Bureau of Statistics. Real Estate Institute of Australia (REIA) president David Airey believes that we are simply seeing the market normalise.

“We had about 170,000 first home buyers in the past year – that’s about 50 percent above the usual number in the market, so I expect them to drop back to normal levels,” he told the Daily Telegraph.

Airey also believes that this will mainly affect properties in the lower price range. “The reduction in first-time buyers will certainly have an effect in the $250,000 to $450,000 price range, which is typically where these buyers aim for. Properties in this range could see sales decline but it will be a limited affect and probably not noticeable until the first quarter of next year.”

With interest rates on their way up over the next one-two years, what will it really take for rates to drive first home buyers from the market?

For example, Elena just took out a $270,000 25-year loan with a variable rate of 5.5 percent p.a. If her interest rate increased by 0.5 percent, this will add $82 to her monthly repayments each month.

The rule of thumb is to keep a 2 percent buffer to allow you to calculate if you will drown under a wave of rate rises. Using the example above, if Elena’s rate eventually rose from 5.5 to 7.5 percent, her monthly repayments will be about $337 more or $1,995.

Some first home owners are taking the initiative of increasing their monthly repayments by 2 percent now while their rate is still low. By adding $337 to Elena’s monthly repayments, she could save $75,000 of interest and potentially reduce her loan by over seven years.

Don’t let a few rate rises scare you away from owning a home. The message for first home buyers is caution, not clear out. Stick to your budget when browsing the market and start comparing for the lowest home loan rates today to beat the trends and save thousands.

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