Interest rates have now been stagnant for more than a year, with the last change in March 2005. A recent increase in CPI to the Reserve Bank’s magic marker of 3% has many economists arguing about an interest rate change. Regardless of when a change does occur, one sure way to weather the storm is to fix all or part of your loan for a number of years.

Currently many lenders have their 3 and 5 yr interest rates about 0.3% below their standard variable rate. Although the number of fixed rate loans was down from January, it is still higher than historical averages; with 13.8% of owner occupiers fixing their home loans, compared to averages of between 7-8%.

The average Australian home loan is currently $216,900, with the breakdown by State and Territory being:

NT $185,000
NSW $248,200
ACT $212,800
Qld $222,000
WA $195,400
Tas $166,200
Vic $215,200
SA $165,800

Until fairly recently, it was common for those getting into the property market for the first time to spend many years saving a deposit to buy their own home. For some this will be their only venture into the market, while for others it will be the first step towards building a property portfolio. Today however it is not unusual for young couples to continue living in a rental property and to enter the property market by purchasing an investment property.

Unless you have saved diligently for many years, or received substantial financial help from family members, your first property purchase may not be your dream home. An alternative is to invest in affordable property with good capital gain. This can provide you with a solid base from which to continue building an investment property portfolio, or give you the means to build up the equity required to purchase a property in which you will live.

As buyers seek new opportunities and the property market evolves, so lenders must develop new loan products, which leads to changes in the way borrowing capacity is calculated. Regardless of whether you’re an experienced investor or just getting into the market with your first home, it pays to do a little work beforehand to make sure you meet the lender’s criteria, maximising the chances of a successful outcome.

As we have discussed in the past, lenders assess borrowing capacity using a range of criteria which can be subject to change. In fact keeping up with these changes is a full-time job, which is why more than 40% of Australians use a professional mortgage broker.

Did you know: in the last 3 months a number of larger lenders have agreed to accept non-standard deposits such as the First Home Buyers Grant; a gift of money; or even proof that you have been paying rent over a period of time.

Review your savings history

Increasingly from a lender’s perspective it is important that a potential borrower demonstrates a good overall savings history. The introduction of 95%, 97%, 100% and even higher loans has allowed those able to demonstrate they can service the loan, to borrow a higher portion of the value of the property. However if you are considering purchasing property with only a minimal deposit, be aware that you will generally have to demonstrate stable employment and genuine savings of 3-5% over 3-6 months.

Having said that however, it is also possible to use other sources of income for deposits, but these will usually result in a higher interest rate loan and will attract higher lenders mortgage insurance (LMI) premiums. A good mortgage broker should be able to tell you which lenders do not require genuine savings of at least 3% in your account.

Factor in ‘opportunity’ costs

Unless you have a 20% deposit (and just recently 2 lenders have introduced a 15% deposit) you will be required to pay Lenders Mortgage Insurance (LMI). This should be factored into your overall purchase costs, although many lenders will allow you to build it into the amount you borrow.

In today’s ‘post-property market boom’ the average house price in all capital cities means a 20% deposit represents years of savings for a first time buyer. Today it is not uncommon for purchasers to consider LMI an ‘opportunity’ cost. In other words, it is a cost they are happy to bear now if it means getting into the market sooner and building up equity faster.

The cost of LMI premiums varies between lenders and is generally not negotiable, so make sure when looking at different loan products that you include this cost in your assessment. Remember LMI is for the lender not you; it protects the lender in case you default.

You should also speak to your accountant about how LMI may be considered a borrowing cost on an investment property and deducted over 5 years.

Did you know: the average Australian house price is now $320,000 which means savings of $64,000 for a 20% deposit. Stamp Duty alone could add another $15,000 to this figure. How long would it take you to save that sum?

Look out for Part 2 of this article next month.

In the mean time please call me on 1800 464 810 if you’d like to discuss your potential borrowing capacity, and don’t forget to visit InvestKit on the website for a copy of How to Improve Your Borrowing capacity.