Hugh shared some knowledge in The New Daily article, ‘Why buyers should think twice before taking out a low-deposit home loan’.
Beware of the hazards
Centaur Financial Services managing director Hugh Robertson told The New Daily many low-deposit holders approach housing with a short-term mindset.
As a result, they have neglected to factor in the effect of rising interest rates on their cash flow once rates normalise.
For example, a 30-year, $800,000 mortgage with an ongoing interest rate of 2.5 per cent would cost $105 extra per month if rates rose by just 0.25 percentage points, according to Moneysmart’s mortgage calculator.
Although the Reserve Bank has indicated rates will not rise until at least 2024, rate hikes should be front of mind for those owners when factoring in life events like sudden employment changes or pregnancy, he said.
“Unfortunately, a lot of people in this country think you can’t lose money on property in Australia and no one prices in the risk that things could go wrong,” Mr Robertson said.
“We’ve been without a recession for such a period of time and we’ve had great stability in our economy where people haven’t experienced loss or high-interest rates like they had in the early ’90s.”
Some upsides to buying a home with a low deposit
However, Mr Robertson said there were some benefits to low deposit loans, particularly if prices continued upwards.
For starters, a “forced savings effect” is attached to owning a home that encourages home owners – particularly those with 5 per cent deposits – to penny-pinch.
Mr Robertson said if owners were able to build up enough equity while rates were low, they could then switch to a less risky loan by refinancing, which can lock in lower monthly repayments.
“The trade-off for people on risky loans is they will pay the LMI, but they think the property is going to go up faster than that [cost],” he said.
“But if you are thinking about [a low deposit loan], you need to build up a safety net.
“So that’s where you should then look at income protection, maybe take out home loan insurance with the bank if you can’t make the payments.”