Homeowners: Refinance, Upgrade or Both?

What homeowners should do while rates are still low.

Upgrading to a larger, better positioned, or more valuable home can allow homeowners to take advantage of surging prices, but a booming market can make the move challenging.

While it might be easier to achieve a great price when selling, it is just about impossible to score a bargain in the current market, considering countless upgraders – who have put off a move for several years – are diving in at once.

When prices rise across the board, the gap between the value of a homeowner’s current property and a more expensive one grows, potentially pushing the most desirable properties out of reach.

The proportion of upgraders who buy before selling tends to increase when prices rise. Homeowners are more confident they will achieve a strong result selling their original home, and many prefer selling quickly after buying rather than rushing to find a home after selling.

Homeowners who manage to take the leap could realise both the lifestyle benefits that upgrading can bring and the financial rewards of increased exposure to a rising market.

History shows over a long period of time, getting a bigger, better quality property in a better location does pay off in terms of the house price gains.

Interest rate outlook

Rising prices are not the only factor for upgraders to consider before making a move. The latest statements from the Reserve Bank of Australia suggests homeowners could expect the ultra-low interest rates that have fuelled rising prices to increase by 2024.

Sometime in the next few years, the interest rates will be higher than they currently are today. With the RBA saying they are going to keep the three-year government bond yield at 0.1 per cent, that is probably within the timeframe of when official rates could go up.

Upgrading in a rising market could build wealth, provided owners can meet borrowing costs into the future.

An economic recovery that exceeds expectations and increases inflation could potentially bring rate hikes forward.

The RBA has indicated the official cash rate will remain low for some time. However, the economy is performing better than many expected, which could impact the outlook for rates if sustained.

One thing to remember is that banks can raise the rates they charge out of cycle and on their own accord at any time. Record- low rates will not last forever, and we are already seeing some lenders raising rates.

Take Advantage

There are ways both new buyers and upgraders can take advantage of the low-rate environment and prepare for the upcoming future.

If we do get an interest rate tightening cycle, you do expect rates to go up by a percentage point or two. See what sort of an impact that will have on your monthly repayments.

If you have got your foot in the door or you are upgrading, enjoy these low interest rates and use this opportunity to try and reduce some of your debt. Upgrading is attractive when rates are low, and prices still have further to rise.

Borrowers still paying outdated interest rates should shop around, as refinancing can pay off even if an upgrade is on the agenda.

Homeowners in a secure financial situation who are not planning on moving could consider fixing part of their loan, with rates below 2 per cent available.

If you want to fix part of your loan, make sure you have negotiated the best variable rate possible first because once you are fixed, you will not have the same bargaining power on that variable component.

Borrowers choosing to fix need to anticipate potential rate increases that could occur during their fixed term or risk a sudden jolt to their finances if rates jump a few percentage points.

Some of these products are fabulously attractive. But plan for when these things end.

If you would like to discuss any of the content produced in this article, please feel free to get in contact with our office either via phone or email.

Ph: 03 9693 5000

Email: office@dfknugents.com.au

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