How to manage your property finances

Australians are a nation of property lovers, with real estate prices a hot topic at every barbecue, pub or family gathering. It’s been an even bigger subject during the pandemic as we have spent so much time at home and re-considered what really matters.

This was the topic of a recent podcast discussion between Bendigo Bank’s head of economics and market research, David Robertson, and Kate & Mandy, hosts of Make it Count with Too Peas in a Podcast. The pair sat down with David to explore some of the common questions families have when they are thinking of buying property, especially in the current environment.

Up or down?

The first topic for discussion was the direction of the official cash rate, which is set on the first Tuesday of each month, aside from January, by the Reserve Bank of Australia. (RBA) The cash rate is one of the most important variables that affects a family’s finances because it helps determine the interest rate borrowers pay on their mortgage and other loans. So when the cash rate goes up, generally, so do home loan and other repayments. The good news is at 0.1 per cent, the cash rate is as low as it’s ever been.

“The cash rate should remain very low for at least the next year,” says David. RBA Governor Philip Lowe has said the central scenario is for the cash rate to remain at 0.1 per cent until 2024.

It’s important for families to understand they have options when it comes to managing the impact of rising interest rates on their finances, such as re-negotiating their home loan now to fix the interest rate at current lows, if that suits their circumstances. It’s also important to budget for any interest rate rises that are expected in the future.

It’s your castle

There’s been a real shift in the way people view their homes during the pandemic, with many seeking more room and outdoor areas.

“We’ve really prioritised space over location. So many of us don't necessarily need to live close to cities any more. Quality of life has become really important,” says David, who believes this will have long-term impacts on family living.

“We now place greater value on the size of our backyard and proximity to open spaces. So demand for detached dwellings has jumped, which is driving up property prices for standalone houses, while apartment prices have not lifted as much,” he said.

An unknown is how many of us will continue working from home when businesses start welcoming staff back to the office. It’s possible a hybrid way of working will become popular, with people working partly from business premises and partly from home. This can help families manage their costs, given working family members won’t pay as much for transport to and from the office if they are partly working from home.

Lending rules tightening

Property investors should also be aware of a new rule introduced by regulator the Australian Prudential Regulation Authority (APRA) that requires banks to apply more stringent loan serviceability stress-testing to new loan applications.

APRA now expects banks to ensure new borrowers can withstand an interest rate rise of more than 3.0 per cent above the rate charged over their mortgage, up from the current rate of 2.5 per cent.

In the podcast, David also noted how important loan-to-value (LVR) ratios are when it comes to ensuring borrowers can meet their obligations and in ensuring the bank meets its responsible lending obligations.

As a general rule, many lenders approve loans with an 80 per cent LVR. This means the borrower has a 20 per cent deposit when they take out the loan and the bank provides the remaining 80 per cent to purchase the property, which becomes the mortgage, not including fees and other charges.

As for the future, while 2021 has had its fair share of challenges, David is positive about what’s to come. “We should have confidence in the ongoing resilience of the economy as we head in to 2022.”