Since the Reserve Bank started cutting interest rates, the pricing for houses have soared. First time home buyer’s mortgages are now made up of up to 25% more debt than before the interest rate cuts. First home buyers are trying to get into the market as home prices go higher and higher. Three years ago borrowers were taking on $68,400 less debt than they are now. New home loans are now averaging $362,000 which is 23% higher than before the interest rate cuts. The RBA’s governor, Glenn Stevens, started cutting interest rates three and a half years ago and since then housing prices have gone through the roof because of how cheap it is to take on debt for a mortgage.
First Home Buyers Hit Hard
Since late 2011, NSW has seen an increase of over 18% in average loan sizes, bringing the home loan for the the average NSW citizen up to $384,500. Dwellings in Sydney have seen prices go up 15% in just one year and 49% since the interest rate cuts began. First home buyers are finding it more difficult to buy into Sydney neighborhoods as 40 new suburbs have risen to have a median house price of $1 million in the past six months. Now according to the stats one in three suburbs in Sydney has a median house price of $1 million.
First home buyers need to consider the life of the loan when taking on such debt. Since mortgages tend to be 25 to 30 years and interest rates are likely to rise during the life of the loan, payments on that mortgage are very likely to go up significantly. First home buyers might not be considering the long term risk associated with so much debt over such a long time so they need all the financial advice they can get.
Interest only loans are bringing down the monthly cost but it does not require the borrower to pay off any of the principal. Living at the edge of borrowing capacity can be very risky when interest rates eventually rise. The Australian Prudential Regulation Authority has spotted some banks that are not properly assessing borrowers’ ability to pay their mortgages. First home buyers should weigh their options carefully and not over borrow, but that can be difficult when home prices are steadily going up and large mortgages are so easy to come by. If it is your first time buying a home then make sure to consider the chances of interest rates rising and housing prices falling sometime over the course of your mortgage.