Why low rates don't mean low risk: Mozo warns on investor traps to avoid

Failing to consider changing rates or personal circumstances could lead to repayment challenges down the track

With the official cash rate at an all-time low, many people are looking to take advantage and jump into the property market.

According to independently owned comparison service Mozo.com.au, the average variable home loan rate has dropped below 5% - the lowest it’s been since the 1950s. Fixed rates are at record lows with the best one and two year rates now under 4%.

But do the low rates mean that it’s a great time to buy a property? Is it a risk free zone?

In a competitive market, low rates don’t necessarily mean low risk, says Steve Jovcevski, a property investment expert and home loan negotiator with Mozo.

Jovcevski says that with interest rates so low, many buyers are neglecting to do all the necessary research.

“They’re not doing the property building inspections, or seeing if there’s a power line running close by, or checking if they have their finances sorted,” he says.

“There’s all sorts of factors where you could potentially lose your deposit because you may not fit the criteria, so sort out your finances.”

Patrick Bright, founder of Sydney-based buyer’s agency EPS Property Search, says that often prospective buyers get so excited about the idea of purchasing a new home that they forget about evaluating their finances.

“They base their home loan on their current financial circumstances and don’t take into account their future plans, like starting a family, or allowing for the fact that rates will rise at some time in the future,” Bright says.

Bright says that it is important to remember that interest rates won’t stay this low forever. History shows that once interest rates do begin to rise again they can shoot up very fast. For instance, in just 13 months from October 2009 to November 2010 rates increased by almost 2%.

One of the keys to avoid the trap of rising interest rates is to ensure you can afford repayments on a higher amount.

“There’s no downside to making repayments above your required level as it gives you a safety net in case of difficult financial times or allows you to pay off your mortgage sooner,” says Bright.

While low rates are not a reason for borrowers to go overboard, they still represent a great opportunity for a buyer who does research. The Mozo home loan comparison tables show there is still a big difference between the best and worst rates on the market, with variable rates ranging from approximately 4.23% to 6.13% (at the time of writing). This difference can add up to thousands of extra dollars in interest each year, so borrowers still need to do their homework to find a competitive loan.

“A lot of people now think because they can afford the home loan the rates are going to be low forever. Obviously they are not, they change, and when they do go up, people need to make sure today they can afford that home loan 2 or 3% higher,” says Mozo’s Jovcevski.

With record low interest rates it still pays to remain patient and do your homework.

For information on property loans, rates and more, visit Mozo.com.au or click here for the free Property Observer eBook, Get loan-savvy – tips for a first time, investment or refinancing loan, which helps you decide on a home loan that meets your requirements.